A study of transfer pricing professionals in Eastern Europe

Ethics in transfer pricing.

A study of transfer pricing professionals in Eastern Europe

Student: Iulia Maria Suciu

Student number: 10874771

Date: 22nd of June, 2015

Word count: 23.637

Program: MSc Accountancy and Control, variant Control

Institution: Faculty of Economics and Business, University of Amsterdam

Supervisor: PhD Candidate Conor Clune

Ethics in transfer pricing. A study of transfer pricing professionals in Eastern Europe 2

Statement of originality

This document is written by Iulia Maria Suciu who declares to take full responsibility for the

contents of this document.

I declare that the text and the work presented in this document is original and that no sources

other than those mentioned in the text and its references have been used in creating it.

The Faculty of Economics and Business is responsible solely for the supervision of completion

of the work, not for the contents.


Abstract

Purpose - The purpose of this paper is to provide an understanding of the transfer pricing

professionals’ perception of ethics.

Design/methodology/approach - This paper’s aim is addressed through a case study that examines

the meaning and place of ethics in a specific transfer pricing context. Relevant information for this

case study was gathered from nine semi-structured interviews with transfer pricing professionals and

documentary analysis. The theoretical framework used for the mobilization of this study refers to a

synthesis of factors that generate ethical dilemmas in a tax environment. Additionally, the ethical

perceptions of transfer pricing specialists were explained using Jones’ issue-contingent model of

ethical decision making.

Findings - The case study unveils that the focus of transfer pricing professionals is oriented towards

defending their clients, as this ensures their firm’s survival. There is no place for ethics in transfer

pricing area, as it is surrounded by subjectivity and lack of clear rules, but there is a clear commitment

to the legislation. The ethical behavior of the transfer pricing professionals is impeded by three factors:

the artistic nature of transfer pricing, regulatory issues and professional body issues. Moreover, there

is a strong concern for risk management procedures as these help them to maintain a good reputation.

Both risk management and reputational concerns were associated with a higher degree of ethical

behavior.

Research limitations - The main limitation refers to the low degree of transferability of the findings

to another contextual setting as the transfer pricing professionals perceptions are undoubtedly

influenced by the context in which they operate. Moreover, the findings may suffer from subjectivity

issues since the data was analyzed by a single coder.

Originality/value - This paper is the first to analyze transfer pricing professionals’ perceptions of

ethics. It offers an in-depth empirical analysis of transfer pricing consultants’ view of ethics, focusing

on the factors that generate ethical dilemmas.

Keywords ethics, transfer pricing, risk management, transfer pricing professionals, perception of

ethics


Table of Contents

List of abbreviations, tables and figures ......................................................................................................... 5

1. Introduction ............................................................................................................................................... 6

2. Literature review ........................................................................................................................................ 9

2.1. Tax avoidance .................................................................................................................................... 9

2.1.1. Introduction to tax avoidance ................................................................................................. 9

2.1.2. Ethical aspects of tax avoidance ........................................................................................... 10

2.1.3. Jones’ issue-contingent model of ethical decision making in organizations .................. 14

2.2. Theoretical framework: factors that generate ethical dilemmas ............................................... 17

3. Methodology ............................................................................................................................................ 22

3.1. Data collection and analysis ........................................................................................................... 22

3.2. Case context ..................................................................................................................................... 24

4. Findings ..................................................................................................................................................... 27

4.1. Introduction to the case ................................................................................................................. 27

4.1.1. Short tale on transfer pricing ................................................................................................. 27

4.1.2. The ethical concept meaning................................................................................................. 29

4.2. Ambiguity in the law ....................................................................................................................... 31

4.2.1. The artistic side of transfer pricing ....................................................................................... 31

4.2.2. Regulatory issues ..................................................................................................................... 37

4.2.3. Professional body issues ........................................................................................................ 40

4.3. Multiple stakeholders: conflicting demands of tax professionals ............................................. 42

4.4. Risk management and reputation ................................................................................................. 46

4.4.1. The risk management procedures ........................................................................................ 46

4.4.2. Reputation ................................................................................................................................ 48

5. Discussion ................................................................................................................................................. 51

6. Conclusion ................................................................................................................................................ 54

7. References ................................................................................................................................................. 56

Appendix 1: Interview Guide ......................................................................................................................... 62


List of abbreviations, tables and figures

List of abbreviations

Abbreviation Definition

TCO Tax consultancy organization

BEPS Base Erosion and Profit Shifting

TP Transfer pricing

OECD The Organization for Economic Co-operation and Development

List of tables

Table 1. Moral intensity components ........................................................................................................... 15

Table 2. Overview of interviews undertaken ............................................................................................... 23

List of figures

Figure 1. Jones’ issue-contingent model of ethical decision making in organizations ........................... 17

Figure 2. Theoretical framework - factors that trigger ethical dilemmas ................................................. 21

Figure 3: Summary of the findings ................................................................................................................ 50


1. Introduction

In the recent past globalization has shaped the economic world. According to OECD today more

than 70% of world trade takes place within multinationals (Tax Research UK, 2010). The price at

which companies from various jurisdictions and from the same multinational group (under common

control and with common interest) trade goods and services is referred to as transfer pricing. Transfer

pricing is a controversial topic being in the attention of tax authorities around the world due to a series

of scandals about its malicious use in the process of tax minimization by multinational giants such as

Google, Starbucks and Amazon. Transfer pricing is the most significant tax avoidance mechanism

used to exploit gaps and grey areas in tax rules to artificially shift profits to low or no-tax locations

from high-tax jurisdictions, resulting in little or no overall corporate tax being paid. In this regard, the

United States were first to acknowledging the matter at hand back in the 1917 when the IRS was

authorized to allocate income and deductions among affiliated corporations. Latest developments on

the issue include the OECD project named Base Erosion and Profit Shifting which is planning to limit

these aggressive tax strategies by providing the regulatory instruments needed to address this issue.

Most of the transfer pricing research has focused on discussing the transfer pricing methods

(Pfeiffer et al., 2011; Sahay, 2003), the managerial problems encountered due to divisional transfer

pricing (Baldenius et al., 2004) or the malicious role of transfer pricing in depriving the rightful revenue

to the countries entitled to receive it (Bartelsman and Beetsma, 2003; Christian Aid, 2005, 2009; Sikka

and Wilmott, 2010). Furthermore, a recent handful of few studies have argued that multinationals play

an unethical and anti-social role in their efforts to maximize profits and that the tax practitioners are

providing help by acting as local facilitators (Otsunaya, 2011; Sikka and Hampton 2005; Sikka and

Wilmott, 2013). This raises important questions regarding the ethical concerns of the tax professionals,

topic which has not been highlighted in the transfer pricing field, while there is just a little work done

on ethics in tax practice (Doyle et al., 2009). Specifically, the ethical aspects of transfer pricing have

been addressed just by a few papers which merely discuss the ethical implications of transfer pricing

(Jeffers et al., 2008; Mcgee, 2010), outline types of harms (Mehafdi, 2000) or present transfer pricing

ethics using the concept of tax ethics - tax practitioners must comply with the laws – and moral ethics

- tax practitioners should do what is right – (Hansen et al., 1992). None of the previous papers have

presented case data regarding the perceptions of transfer pricing professionals in an organizational

context.


The motivation for this paper consists of three reasons. Firstly, recent years have witnessed an

increased societal attention to the transfer pricing practices and their role in enriching the

multinationals and their facilitators while impoverishing the societies (Mehafdi, 2000; Sikka and

Wilmott, 2010). Developing an understanding of the perceptions of ethics of the transfer pricing

professionals can provide a valuable insight and facilitate policy makers and professional bodies with

appropriate responses. Secondly, given the subjective nature of transfer pricing, the fact that it “is not

an exact science” (OECD, 2010) and the current development of BEPS project by OECD, this

research can provide a better understanding of the issues in the transfer pricing field and the factors

that enable the design of aggressive schemes. Thirdly, this is to my knowledge the first empirical study

to engage in case-based work examining the ethical perceptions of transfer pricing professionals.

This paper aims to provide an understanding of the ethical perceptions of transfer pricing

professionals. Using a theoretical framework that presents factors that give rise to ethical pressures, it

presents the most important factors that raise issues in the transfer pricing field as well as field specific

characteristics. Given the fact that the ethical perceptions revolve around ethical dilemmas and their

approach, this framework facilitates the reveal of these professionals’ viewpoints and provides a

complete picture of the ethical environment of the transfer pricing professionals through their specific

lenses. In addition to the theoretical framework, this study adopted a theory on ethical decision making

process to unveil the defective stages in practice. This mobilization of theory is pursued as it is a

comprehensive theory which allows theorizing the findings.

This paper’s aim is addressed through a case study that examines the meaning and place of ethics

in transfer pricing activity. Specifically it involves conducting semi-structured interviews with transfer

pricing professionals from a professional services firm specialized in provision of transfer pricing

services in Eastern Europe, which situates among the top providers of transfer pricing services in its

operating country according to revenue and reputation. This paper focuses on the Eastern European

for three reasons. Firstly, there is a lack of academic research into Eastern European context. Secondly,

transfer pricing is a relatively new practice in this context, hence it is an interesting topic to investigate

as it is probably to develop in the near future. Thirdly, taking into consideration that Eastern Europe

is a developing area and that transfer pricing is more daunting in developing countries, perceptions

from a developing context may be more insightful and revealing than in a more developed context.

Lastly, there is a limited capacity of revenue authorities to conduct transfer pricing audits in this area,

hence it is important to understand the ethical perceptions of the consultants within this environment

to be able to react properly.


This paper contributes to prior research on ethics in tax practice in two ways. First, it seeks to

empirically advance prior research by examining the tax practice in Eastern Europe, thereby

responding to calls to empirically research the tax practice field (Special Issue of Critical Perspectives

on Taxation, 2010; European Accounting Review Special Issue on Tax Research, 2015). Specifically

this paper reveals how ambiguity in the tax law, multiple stakeholders issue, risk management and

reputational issue impact on the operationalization of this practice. Moreover this paper brings a

second novel contribution to the prior literature by scrutinizing the perceptions of ethics of transfer

pricing professionals, thereby answering to calls for research for further insights into tax professionals’

ethical decisions (Shafer and Simmons, 2008) and to the “the need for empirical studies that

specifically address TP ethics” (Mehafdi, 2000, p.369). In this case, I found that the artistic nature of

transfer pricing empowers professionals to engage in creative data management, use argumentation

and professional judgment to fulfill their main duty of defending their clients, hence engaging

themselves in what could possibly be unethical behavior. Regulators and professional bodies seem to

enable this behavior through lack of appropriate control. In contrast with the ethical commitment,

risk management procedures are quite important to protect the firm’s reputation and implicitly its

survival.

The remainder of this paper is organized as follows. First, the literature review on tax avoidance,

ethical aspects of tax avoidance and Jones’ issue contingent ethical decision making model will be

discussed concluding with presenting the theoretical framework employed for outlining the findings.

Next, the research methodology will be illustrated presenting information regarding data collection,

data analysis and case context. This is succeeded with a discussion of the case narrative examining the

transfer pricing consultants’ perceptions of ethics. The discussion section employs Jones’ issue

contingent ethical decision model to unveil the ethical decision making process and its flaws. The final

section concludes and provides suggestions for further research.


2. Literature review

The literature review is structured in two sub-sections. First, it starts with a broad discussion on

tax avoidance then specifically address the ethical aspects of tax practice. Prior literature lists common

ethical issues in tax practice and describes the ethical decision making process as a complex and step

divided process that can often be influenced by individual or organizational factors. Next, the Jones’

issue-contingent ethical decision making is presented. The second sub-section presents the theoretical

framework, which consists of eleven factors that generate ethical pressure in the tax practice

environment.

2.1. Tax avoidance

This sub-section is divided in three parts. First the tax avoidance concept is addressed and

relevant prior literature about tax avoidance is discussed. Next the field of tax ethics is examined

concluding with the Jones’ issue contingent ethical decision making model.

2.1.1. Introduction to tax avoidance

In the recent years there has been increasing discussion surrounding tax avoidance. It is a

common topic among governments, media, society or universities. Tax avoidance is one of the biggest

elements of the tax gap and needs to be tackled. (HM Treasury, 2011). Tax avoidance is a difficult

term to define and there are a lot of interpretations. By aggregating those definitions one can say that

tax avoidance is the practice of using techniques to minimize tax liability while following the letter of

the law. A more formal definition of tax avoidance provided by HMRC (2012, p. 1) is:

“Tax avoidance is bending the rules of the tax system to gain a tax advantage that Parliament

never intended. It often involves contrived, artificial transactions that serve little or no purpose

other than to produce a tax advantage. It involves operating within the letter – but not the spirit

– of the law. Tax avoidance is not the same as tax planning. Tax planning involves using tax reliefs

for the purpose for which they were intended.”

A notable distinction has to be made between tax evasion, which is illegal and tax avoidance,

which is not. Tax evasion refers to the practice of hiding or ignoring the tax liability. The HMRC 2014

report on tax gap estimates for the period 2012-2013 claims that the tax gap is 6,8% of the total tax

liabilities (£34 billion) and that tax evasion, respectively tax avoidance is responsible for 12%, 9% of

it.

https://www.gov.uk/government/organisations/hm-treasury


Studies have shown that tax avoidance can be reduced by increasing tax enforcement. Hoopes et

al. (2012) reported that US public firms undertake less aggressive tax positions when tax enforcement

is stricter. Going to a different level of power, from the regulator to the management team of a

company, Dyreng et al. (2010) found out that top executives have a significant role in determining the

level of tax avoidance that firms undertake. This can be explained through the fact that reputational

concerns affects the degree to which managers engage in tax planning (Graham et al., 2014). Moreover,

Hardeck and Hertl (2014) examined the link between corporate tax strategies and corporate social

responsibility and reported that aggressive corporate tax strategies are related with damaged corporate

reputation, while on the contrary responsible corporate tax strategies enhance the corporate success

measured through corporate reputation, consumer purchase intention, and willingness to pay.

Regarding corporate social responsibility, Lanis (2015) found out that there is a direct and negative

relationship between corporate social responsibility and tax avoidance. This result is supported by Hoi

et al. (2013), who concluded that firms with irresponsible CSR activities are more likely to engage in

tax avoidance activities and greater discretionary/permanent book-tax differences. Moreover, Ylönen

and Laine (2014) presented a qualitative case study of the tax planning arrangements of a multinational

using transfer pricing as a tax avoidance tool, and argue on the fact that corporate taxation needs to

be considered as a CSR issue and require a careful examination of what corporations actually say in

their tax disclosures. The corporate social responsibility is enhanced through proof of ethical behavior.

In the tax literature, tax avoidance is incorporated into the field of tax ethics (Frecknall-Hughes, 2007).

Next there will be a discussion about the ethical facets of tax avoidance.

2.1.2. Ethical aspects of tax avoidance

Before discussing the ethical aspects of tax avoidance, a proper introduction to ethics has to be

made. Morals are the norms, values and beliefs that govern which actions are right or wrong and ethics

is the study of morality. Ethics “is concerned with understanding what determines whether something

is good or bad, right or wrong” (Lewis and Unerman, 1999, p. 522) and enlighten clear rules and

principles which determine the right and wrong for any situation. During this paper the terms of

ethical and moral are considered equivalent and will be used interchangeably. In the business

environment, the concept of business ethics is defined in a variety of ways. In this regard, Lewis (1985,

p. 381) reviewed and examined the literature on business ethics and provided the following definition

of business ethics: ”rules, standards, codes or principles which provide guidelines for morally right

behavior and truthfulness in specific situations". He argues that although the definition provided is


abstract, it highlights the common concepts used by business writers and professionals – moral rules,

standards, codes and principles governing individual behavior. Although the definition provided by

Lewis (1985) is a simple one and in connection with the general definition of ethics, in practice things

may not work like they are supposed to. According to Gill (2009, p.112) in a corporation everyone

“operates in a different moral environment comparable to that described in the corporate context”.

In other words, even if in a corporation there are specific guidelines, rules to follow in order to assure

a proper and ethical behavior, often there are interests in organization that do not fit in the ethical

norms. This is the case that Gill accentuates when citing a former vice-president of a large firm:”What

is right in the corporation is what the guy above wants from you. That’s what morality is in the

corporation” (p. 112).

As tax environment is a technical and complex area, it is characterized by the presence of ethical

pressures. Marshall et al. (1998) presented a list of ethical issues in terms of perceived frequency

occurrence and importance to tax practitioners. Failure to make reasonable enquiries when

information or documentation provided by a client is incomplete or inaccurate is the most frequently

cited ethical issue, while the most important ethical issue is failure to ensure confidentiality regarding

client information. When combining high frequency with high occurrence ethical issues they found as

ethical issues: failure to make reasonable enquiries when information is incomplete or inaccurate,

failure to maintain an adequate level of technical competence, continuing to act for a client in

circumstances where incorrect or inaccurate information is not corrected by the client, conflicts

generated by having to differentiate legitimate tax planning from tax avoidance, failure to conduct

adequate research, concealing limitations in a tax practitioner’s technical competence. Therefore,

Marshall et al. (1998) revealed that area of competence, credibility and professional competence

represent issues of overriding concern to tax practitioners in carrying out their duties. Moreover, client

pressure was identified as the most difficult ethical problem faced by tax practitioners (Cruz et al.,

2000). The study investigated professional tax practitioners' ethical judgments and behavioral

intentions in cases involving client pressure indicated that ethical decision making is mainly influenced

by the moral equity dimension (which includes items relating to philosophies of justice (fair/unfair,

just/unjust), followed by the contractualism (which includes two deontological items – violates/does

not violate an unspoken promise, violate/does not violate an unwritten contract) dimension.

The act of ethical decision making is a complex one and still not completely understood. Rest

(1986) presented a model of moral decision-making that involves four steps: moral sensitivity

(recognition of an ethical issue), moral judgment or reasoning, moral motivation or intent and moral


character (engaging in moral action). Regarding the first step in this ethical decision making process,

Yetmar and Eastman (2000) employed a study to examine the role of ethical sensitivity in ethical

decision-making by examining the decisions of tax practitioners. They found that there is a positive

relationship between ethical sensitivity and job satisfaction for a tax practitioner, and a negative

relationship between role conflict (i.e. degree of incompatible expectations communicated to an

employee of an organization by others within and outside the organization) and ethical sensitivity.

Yetmar and Eastman (2000) argue that in the relationship found regarding job satisfaction and ethical

sensitivity, there might be some degree of causation, in both direction as it is not unlikely that the

more ethical is the tax practitioner the more job satisfaction he experiences. Furthermore, Doyle et al.

(2013) examined tax consultants’ moral reasoning in a societal and tax context using Kohlberg’s six

stages of development theory. They found out that tax consultants reason at lower level in tax contexts

than when considering social context ethical dilemmas. Based on the reviews made on empirical ethical

decision making in the literature made by Ford and Richardson (1994), O’Fallon and Butterfield (2005)

and Craft (2012) covering the prior literature from 1972 until 2011, there are no studies on ethical

decision making that cover moral intent on tax / accounting professionals. Regarding the last step of

the decision process, moral character, Shapeero et al. (2003) found that the probability of senior and

staff-level accountants to engage in unethical behavior is lower than in the case of supervisors or

managers.

Along this ethical decision making process, there are many factors that can intervene. In the

literature they are divided in two main categories: individual and organizational factors.

Various studies found out that individual factors have an influence upon ethical / unethical

behavior. Examples of individual factors are: age, ethical judgment, gender, Machiavellianism, work

experience or philosophy orientation. O’Fallon and Butterfield (2005) presented in their literature

review that the intentions to engage in unethical behavior are influenced by attitudes. They have also

reported that assumptions about ethics, deontology and teleological have influence upon intentions.

Machiavellianism is a predictor of professional judgment towards aggressive tax minimization. (Shafer

and Simmons, 2008), a finding that is similar with the fact that Machiavellians are less ethically-oriented

than non-Machiavellians (Rayburn and Rayburn, 1996). Weeks et al. (1999) also discussed the

importance of experience in ethical judgment, as it seems that individuals in the latter years of their

career have higher ethical judgment. In addition relativism oriented individuals are more likely to make

unethical decisions (Callanan et al., 2010).


As Elango et al. (2010) argued, along with individual factors there are also organizational factors

that influence ethical decision-making. Elango et al. (2010) found out that managers take decisions

based on their own experiences and values, but they are also influenced by the ethical standards and

practices observed within the firm. Examples of organizational factors are ethical climate, code of

ethics, organizational climate, opportunity, rewards, sanctions, significant others or training. The

ethical climate has a direct and positive effect upon ethical decision making of auditors (Shafer, 2008).

This is further supported by a study on tax practitioners, which found out that dimensions of ethical

culture (i.e. low ethical norms and incentives that supported unethical behavior) had highly significant

effects on intentions to engage in aggressive tax minimization strategies (Shafer and Simmons, 2008).

Ethical climate may refer to either peer influence, superior pressures or tone at the top. There is

compelling evidence that peer influence, manager influence, supervisors’ expectations influence ethical

behavior. (Beams et al., 2003; Jones and Kavanagh, 1996; Sims and Keon, 1999). Bobek et al. (2010)

reported a difference between partner and non-partner perceptions regarding ethical environments of

their firms and occurrence of ethical dilemmas, with partners having a more optimistic view regarding

the overall firm and firm leadership as acting more ethically.

Another organizational factor is represented by the existence of codes of conduct. There is no

consensus on the influence of code of ethics upon the behavior of the employees of an organization.

Empirical studies found out that codes of ethics do not influence ethical behavior nor judgment

(Douglas et al., 2001) while other studies found that professionals working within firms that have a

code of conduct behave more ethical than professionals within firms without codes of conduct

(McKinney et al., 2010). Hume et al. (1999) reported that most of the certified public accountants

follow the Statements on Responsibilities in Tax Practice (SRTPs) when making ethical decisions

regarding tax return preparation and compared to unlicensed accountants they follow the SRTPs more

often on half of the issues tested. Furthermore, organizational factors consist of rewards or sanctions.

Perceived likelihood of rewards influence individuals to engage in unethical behavior (Shapeero et al.,

2003). Shafer and Simmons’ (2011) findings also support this results. They found out that an

organizational culture that rewarded ethical behavior reduced the chances that tax practitioners will

engage in aggressive tax minimization strategies. Returning to the Rest’s (1986) moral decision-making

model composed of four steps, the discussion continues with the presentation of a model founded on

Rest’s theory, the issue-contingent model of ethical decision making introduced by Jones (1991).


2.1.3. Jones’ issue-contingent model of ethical decision making in organizations

In this sub-section Jones’ (1991) issue contingent model of ethical decision making is introduced

and will be used in the discussion section to help understand the findings. This issue-contingent theory

uses Rest’s (1986) four-component model as a foundation and completes the model by synthetizing

the previous ethical decision-making models: Trevino (1986), Dubinsky and Loken (1989), Ferrel and

Gresham (1985) and Hunt and Vittel (1986). Trevino (1986) presented a general theoretical model,

while Ferrell and Gresham (1985), Hunt and Vitell (1986), and Dubinsky and Loken (1989) presented

models that focus on marketing ethics. This theory is adopted due to its extensiveness, since it

integrates previous ethical decision models. In addition it introduces the concept of moral intensity to

include the characteristics of the moral issue. The ethical decision making model is depicted in figure

1.

Jones starts its discourse by defining moral issue, moral agent and ethical decision. A moral issue

is present when a person’s actions or decisions have consequences for other people and involve choice

on behalf of the decision maker. The moral agent refers to the person that takes the moral decision

with or without recognizing the moral issue. A decision is ethical if it is legal and morally acceptable

to the larger community.

The foundation of this ethical decision model stays in Rest’s four component ethical decision

making theory. Rest presented a four processes plan for ethical decision making. In order for an

individual to engage in an ethical decision making and behavior, he must prove moral sensitivity (i.e.

recognize the moral issue), make a moral judgment, establish moral intent (moral motivation) and act

on the moral concerns (moral behavior). Each component of this ethical decision making is specific

and success in one step does not mean success in the others steps.

The first step involves recognizing the moral issue and is mandatory to be able start the ethical

decision making process, as if an individual can not distinguish the moral issue then it is no ethical

decision making involved. This step involves two elements: an individual must admit that his or her

decisions will have consequences for other people and that some choice is involved.

Next a moral judgment is made which is dependent of the individual’s cognitive moral

development. The moral development of an individual is addressed by Kohlberg’s (1976) six stages of

moral development theory. According to this theory there are three levels of moral reasoning, namely

pre-conventional, conventional and post-conventional level. Each level is divided in two stages,

resulting in six stages of moral development an individual can grow through. The first level of moral

reasoning - pre-conventional level - implies that individuals judge the morality of an action by its direct


consequences. The second level of moral development – conventional level – implies that individuals

judge the morality of an action by comparing it to the society’s views and expectations. The third level

of moral development – post-conventional level – implies that individuals see themselves as separate

entities from society and have their own principles which may be inconsistent with society rules. The

third level is the most advanced level of moral reasoning and suggests that individuals do no longer

see the rules as absolute and start questioning them forming their own ethical principles based on life,

liberty or justice.

In the moral motivation stage the individual must decide the course of action. In this step of the

process the individual will balance moral factors against other factors. One must not confuse the

decision about what is “right” to do with the decision to act on that judgment (i.e. to establish moral

intent). This establishment of the moral motivation is crucial to the ethical decision making process

as intentions are important determinants of behavior. The last component of the process refers to

engaging in the ethical behavior.

None of the previous existent ethical decision models included the characteristics of the moral

issue itself, therefore Jones included in his model the moral intensity variable. He argued that the

previous models that did not contain a moral intensity variable assumed that the moral decision

making of individuals in organizations is identical for all moral issues. Jones argue that people are

inclined to be more bothered by moral issues that affect those who are close to them compared to

those with people that have little or no contact. Moreover, people usually react more strongly to

damages that have immediate effect compared to those that have effect only in the future.

The moral intensity is positively related to every step in the ethical decision making process and

mainly focuses on the moral issue. Moral intensity is composed of six components: magnitude of

consequences, social consensus, probability of effect, temporal immediacy, proximity and

concentration of effect. The following table summarizes these components:

Table 1. Moral intensity components

Component Definition

Magnitude of

consequences

The sum of the harms (or benefits) done to the victims (or beneficiaries) of the

moral act in question.

Example: An action that makes 1,000 people to suffer an injury is of greater

magnitude of consequence than one that causes 10 people to suffer the same injury


Component Definition

Social

consensus

Degree of the social agreement that a proposed act is evil (or good).

Example: The evil act involving discriminating minority job candidates has a

greater social consensus than the evil act involving refusing to act affirmatively on

behalf of minority job candidates.

Probability of

effect

A joint function of the probability that the act in question will take place and the

act in question will actually cause the harm (benefit) predicted.

Example: The act of selling a gun to a known armed robber has a greater

probability of harm than selling a gun to a law-abiding citizen.

Temporal

immediacy

The length of time between the present and the consequences of the questioned

action (a smaller amount of time means greater immediacy).

Example: the act of releasing a drug that will cause harm to 1% of the people that

use it have a nervous reaction in a short timeframe after they ingest it has greater

temporal immediacy than releasing a drug that will cause harm to 1% of the people

that use it have a nervous reaction in 20 years time.

Proximity

The feeling of closeness – social, cultural, psychological or physical – that the moral

agent has for the victims (beneficiaries) of the evil (beneficial) act questioned.

Example: Layoff in a person’s work unit have greater proximity than layoffs in a

remote plant.

Concentration

of effect

The inverse function of the number of people affected by an act of a given

magnitude. Example: The act of denying coverage of 10 people with claims of

€10.000 has a greater concentrated effect than denying coverage to 10.000 people

with claims of €10.

The moral agents are challenged in their decision making by organizational factors. These factors

appear in the majority of the used ethical decision models. They may refer to organizational climate,

rewards, sanctions, ethical codes of conducts, or significant others.


Figure 1. Jones’ issue-contingent model of ethical decision making in organizations

2.2. Theoretical framework: factors that generate ethical dilemmas

In this sub-section is discussed the theoretical framework that comprise eleven factors that

generate ethical dilemmas. This theoretical framework is employed as it facilitates the understanding

of tax professional environment which is characterized by factors that create ethical pressures.

According to the American Institute of Certified Public Accountants the ethical dilemmas related to

tax issues are perceived by its members as the most difficult ethical problem (Fin et al., 1988), thus

focusing on the factors that trigger ethical dilemmas this paper will be able to show a complete picture

of the tax professionals’ view of these ethical dilemmas and encapsulate their perceptions regarding

these factors, hence also about their ethical environment. Also, these factors are used to describe the

tax environment through a tax professional’s lenses.

Figure 2 depicts a summary of the theoretical framework. This theoretical framework was built

and presented by Doyle et al. (2009) through aggregating prior literature.

Ambiguity in the tax law

Tax legislation is a system of rules regarding tax enforced to control behavior. The tax law has

been designed by government and as any human decision process the act of creating the laws has

flaws, specifically in a developing and changing world. Therefore the tax law does not present in a

clear and concise manner how certain situations should be dealt with and lets this to the professional


judgment of the tax practitioner. Hence, in choosing among the alternatives a tax practitioner may

face an ethical dilemma due to this ambiguity (Hume et al., 1999).

Multiple stakeholders

Today’s tax practitioner must be an agile tightrope walker, able to balance a host of divergent

demands. Maintaining one’s equilibrium is indeed difficult as a clamour of voices shout conflicting

demands…In light of this obstacle-laden course, contemporary tax practitioners are bound to

encounter ethical dilemmas as they attempt to cross this often obscure pathway. (Dox, 1992, p.

71)

As highlighted by the previous quote, when taking decisions tax practitioners face multiple and

different demands from their stakeholders: clients, revenue authority, colleagues, superiors,

professional bodies or society. Due to their contradictory interests and the perceived need of the tax

practitioner to fulfill all these demands, ethical conflicts will arise (Yetmar et al., 1998; Yetmar and

Eastman, 2000).

Client pressure

Fin et al. (1998) conducted a study on the American Institute of Certified Public Accountants and

found out that the “client proposals of tax alteration and / or tax fraud” represent the most difficult

ethical issue for the respondents. This pressure to adopt aggressive positions put the tax practitioners

in a troublesome situation as they may face either a client loss or the burden of engaging in unethical

activities.

Tax practitioner aggressiveness

Tax aggressiveness has been described by Carnes et al. (1996) as the likelihood of a tax

professional to take a pro-taxpayer position for a situation that other tax consultants would not

approve. Milliron (1988) discussed about the relationship between this tax aggressiveness and the

ethical attitude of the tax professional. However, it is not known whether the tax aggressiveness of a

tax professional induce a lowering of ethical standards or if the tax aggressiveness comes from a

precise ethical attitude.

Business managers

In addition to their duty of giving advice to the clients from their position as tax professionals,

tax professionals also have the duty of managing or work within a company, which bring additional


ethical dilemmas (Yetmar et al., 1998). Prior literature concluded that the pressure to compromise

personal ethical standards is usually met at the middle or lower management levels.

Reputational issues

Doyle et al. (2009) argue that due to high criticism on the ethical profile of the accounting

profession, it is a need to improve this perception and the ethical behavior of the individuals operating

in this field. For this, an important aspect that has to be addressed is to develop a thorough

understanding of how individual practitioners perceive ethics.

Competition

Prior literature assert that in the case of strong competition, practitioners may be motivated to

misstate their capabilities and accept work for which they lack knowledge or skills (Yetmar et al., 1998).

Thus, competition can cause individuals to neglect ethical aspects (Lewis, 1985). Having also in mind

that tax professionals activate in a highly competitive environment that puts pressure on their struggle

to attract new customers, this may lead to lowering ethical standards of tax professionals due to their

endeavor to maintain and attract clients.

Stress

Tax professionals environment is stressful due to above mentioned highly competitive world, the

amount of money involved in transactions they have to advice on, the multiple and contradictory

expectations and many others. Weick (1983) discussed about the importance of stress in accounting

practice. Weick argues that distress – a great amount of stress that makes performance to be reduced

– can be pointed out by certain behaviors. These behaviors may refer to reduction in the amount of

time given to each task, obstruct new information, appearance of cave in or superficial involvement

and/or negative or sarcastic attitude towards clients. All these are causing decreased ethical behavior.

Moreover, Yetmar and Eastman (2000) assert that a tax professional proves reduced ethical behavior

through arriving at a tax decision after an insufficient analysis for an investigation and defense of a

gray tax issue and subsequently ignoring important evidence that would reverse the original decision.

Also the reduced care and advocacy shown to a client by failing to legally minimize the client’s tax

liability is mentioned as a reduced ethical behavior by Yetmar and Eastman (2000).


Public expectation

In the accounting profession there is a recognition that true professionalism consists not only of

high technical skills but also adherence to ethical standards due to the belief that concern for ethical

conduct singularize the profession. Therefore there is a public expectation that these professionals

(including tax professionals) demonstrate a high technical competence and ethical standards.

The privilege of self-regulation

Doyle et al. (2009) argued that due to various professional bodies and their multiple codes of

ethics, tax practitioners have the privilege of self-regulation.

Risk management

Additionally to their role of generating ethical dilemmas for tax practitioners, the factors

presented above also make tax practice a risky environment. To reduce the risks, firms implement risk

management procedures. There are considerable resources spent by firms of all sizes to design and

improve risk management procedures. These are very important as litigation can be very expensive

and a firm may lose its reputation. Hart (2000) argues that good risk management is beneficial also for

the public interest as it leads to higher quality advice, clarity in clients’ expectations and closer meeting

of these expectations. Doyle et al. (2009) explain that a proper definition of risk management in tax

practice is the “careful identification and assessment of risks before committing a firm to provide

particular tax services”. In addition risk management also refer to the settlement and organization of

accepted projects in a manner that controls and minimize the risks.

Nowadays there is an increased importance of reputational risk due to shift in the paradigm of

the business – the value is created more through intangible assets – and a damage of reputation may

imply a business discontinuity.

To summarize, this theoretical framework presents eleven factors that give rise to ethical

pressures in a tax environment. These factors are presented in figure 2 and refer to ambiguity in the

tax law, multiple stakeholders, client pressure, tax practitioner aggressiveness, business managers,

reputational issue, competition, stress, public expectation, the privilege of self regulation and risk

management. These factors will be used to capture the ethical perceptions of the transfer pricing

professionals. In addition Jones’ issue-contingent ethical decision making model will be employed to

explain and understand the ethical decision making process. Jones described an issue-contingent

model for ethical decision making that comprise four steps of moral decision making: moral sensitivity,


moral judgment, moral intent and moral character. All four steps are influenced by the moral intensity

issue while organizational factors influence moral intent and moral character.

Figure 2. Theoretical framework - factors that trigger ethical dilemmas


3. Methodology

3.1. Data collection and analysis

In accordance with the purpose of this paper - to provide an understanding of the transfer pricing

professionals’ perceptions of ethics - and given that this subject has not been studied in depth before,

the research methodology employed is qualitative research method. As indicated by Bryman (2008, p.

366) in interpretative qualitative research “the stress is on the understanding of the social world

through an examination of the interpretation of that world by its participants”. There are five research

methods under the concept of qualitative research: experiment, archival analysis, history, survey and

case analysis. A case study is chosen for this research proposal as according to Yin (2009, p. 2) case

studies are the preferred method when “(a) ‘how’ or ‘why’ questions are being posed, (b) the

investigator has little control over events, and (c) the focus is on a contemporary phenomenon within

a real-life context.”

The empirical materials used to design this case study consist of semi-structured interviews

conducted with transfer pricing professionals supplemented with documentary analysis. The analyzed

documents consisted of internal documents, the national legislation, the ethical code of conduct of

tax practitioners in the national context as well as the ethical code of conduct of the Chartered Institute

of Taxation from United Kingdom as a comparable document, transfer pricing history reports, OECD

and United Nations transfer pricing reports.

The interviews were conducted at a non-Big 4 transfer pricing consultancy firm in Eastern

Europe. Access to this organization (“tax consultancy organization” or “TCO”) was granted through

an acquaintance with one of the partners of the company. Through this access there have been

conducted nine semi-structured interviews with transfer pricing professionals in order to allow a

flexible discussion and collection of data regarding the view of the interviewees (Bryman, 2008, p.

438). Table 2 provides a summary of the interview records. The professionals interviewed were at the

level of senior, manager, director or partner, with three to seventeen years of experience in the tax

practice. Due to the fact that within TCO only seven employees fulfilled the conditions to be

interviewed there have been contacted and interviewed two other professionals. The first one was a

former director within TCO, former Director of the Transfer Pricing Unit within the Tax Authority

and actual sole practitioner. The second one is a sole practitioner and lecturer to the main economics

university in the country. They were selected due to their expertise in the actual practice and their vast

experience in the field. In addition one person interviewed from TCO is involved only in provision


of tax consultancy and is a former Big 4 manager. She was selected due to her connection with TCO

as well as with additional knowledge to the current situation within the tax profession.

Table 2. Overview of interviews undertaken

Interviewee Position Expertise area Experience Duration

I1 Partner TP 14 years 70 min

I2 Partner TP 8,5 years 43 min

I31 Sole practitioner Tax 12 years 45 min

I4 Manager TP 5 years 50 min

I5 Senior staff TP 4 years 63 min

I6 Director Tax 14 years 56 min

I72 Former Director -

Sole practitioner

Tax and TP 17 years 67 min

I8 Senior staff TP 3 years 22 min

I9 Manager TP 6 years 62 min

Notes: 1 & 2. I3 and I7 were not part of TCO at the moment of conducting the interviews

In order to ensure consistency between the interviews and to increase the reliability of findings,

an interview protocol was followed, that consisted of various rules that guided the administration and

implementation of the interview. Before conducting the interviews all participants were contacted

through e-mail or phone-call through which they were informed about the purpose of the interview,

the approximate duration of the interview and were asked to agree upon a place and time. An

interviewee guide was sent prior to the interviewees to inform them about the themes that will be

discussed during the interview.

At the beginning of each interview, interviewees were asked for consent to record the interview.

It was explained that the information is confidential and that the no other party except the UvA

professors will have access to the data. All interviewees agreed to record the interview. Then, the

objective of the study was presented, followed by collection of face sheet information. Every

interviewee was asked a warm up question “Imagine that you can go back in time X years. Would you

chose practicing transfer pricing / tax again?” in order to allow the interviewee to relax and start

discussing on something he/she is passionate about. Then the questions from the interview guide

were completed by additional questions that arose during the discussion. In the end I concluded with

asking them if they had further questions that were not addressed during the interview and asked them


if further questions are allowed. All agreed to help me further in any additional issues that may appear

during the data analysis.

The interviews were conducted during the period April 1 – April 20. All interviews were

conducted face to face in an office environment. Face to face interviewing is considered to be the

most appropriate method of interviewing as the researcher is able “to observe body language to see

how interviewees respond in a physical sense to questions.” (Bryman, 2008, p. 457).

Average interviewee duration was 53 minutes with outliers of 22 minutes and 70 minutes. In order

to obtain the interviewees personal opinions, open ended questions were developed and structured in

an interview guide, presented in the Appendix 1. The interview guide was developed from studying

prior literature and in connection with the theoretical framework. Given the fact that interviews were

semi-structured I “ask[ed] new questions that follow up interviewees’ replies” (Bryman, 2008, p. 437).

The interviews were recorded and transcribed later verbatim, resulting in 100 pages (58.927 words) of

transcribed interview data.

Data analysis was conducted manually. As this was my first qualitative research project, I printed

the transcribed interviews keeping a wide right-hand margin for writing codes and notes and coded

on the hard-copy printouts by using highlighters and pencils, as this gives more control and ownership

of the work (Saldana, 2009). Moreover this is consistent with the recommendations of Graue and

Walsh: “Touch the data. Handling the data gets additional data out of memory and into the record. It

turns abstract information into concrete data” (Graue and Walsh, 1998, p. 145).

The first cycle of coding was aimed at identifying the significant passages of text and capture the

key themes that were noted in a separate notebook and eliminate those that were not applicable to the

research. The second cycle of coding focused more on the interview data allowing subthemes to

emerge that were linked in a separate notebook in order to create a structure and to form a bigger

picture of the data. The last cycle of coding was made in order to ensure the consistency of the themes

and subthemes obtained. The next sub-section describes the case context.

3.2. Case context

The interviews were performed at a non big-4 transfer pricing advisory firm that operates in a

city based in Eastern Europe. TCO was set up by a former Big 4 manager and is a top player in the

local market in terms of revenues from transfer pricing work. TCO is also an outsourcing service

provider for large transfer pricing advisory international networks and in the recent years it obtained

recognition from respectable publications in the financial consulting word.


TCO provides transfer pricing services that refer mainly to transfer pricing documentation,

transfer pricing policies, transfer pricing reviews, audit defense and benchmarking studies. The major

part of the client work refers to transfer pricing documentation and benchmarking studies. During the

course of a year TCO conducts on average approximately 120 transfer pricing documentation projects

and around 200 profitability benchmarking studies.

Unlike transfer pricing policies, where the consultants advise the clients on the transfer prices that

should be used in related party transactions, in transfer pricing documentation files the consultants

are contacted fait accompli. Given the fact that in Eastern Europe there is no major presence of

multinationals headquarters and that transfer pricing policies are established at the mother company

level, transfer pricing consultants in Eastern Europe do not deal with transfer pricing policy on a day

to day basis, thereby they have to do most of their work in drafting transfer pricing documentation

files and preparing profitability benchmarking studies.

Transfer pricing documentation file is a post-factum analysis of the transfer prices used by a

company in the transactions with a related party. It is a defense mechanism that consists of a report

with five chapters: presentation of the company, presentation of the group to which the company

belongs, functional analysis of the company where there are presented functions performed, risks

assumed and assets used, overview of the intra-group transactions and analysis of the transactions. In

conclusion TCO is generally hired by the local company of a multinational group to help them defend

the transfer prices applied ex-ante in front of the local regulator. The TCO work is consisting of

writing down the facts and making various price/profitability analyses in what is known as a transfer

pricing file. The client shall never write by its own in the transfer pricing file, but rather can review the

final file and give its recommendations on what it does not agree with. When handing down the final

transfer pricing file the TCO sends also to the client a management memorandum highlighting the

technical approaches undertaken in defending transfer prices and the risks that within a tax audit, the

tax auditors may not agree with the approaches undertaken.

TCO team includes 12 transfer pricing consultants among which some are ADIT (Advanced

Diploma in International Taxation) certified. Transfer pricing specialists are not required to obtain a

certification in accounting. TCO specialists played a major role in implementing the OECD standards

in the tax legislation within the region.

The professional body governing the tax practice in the discussed context is relatively new. In

order to obtain a certification from this body and obtain the quality of certified tax consultant, one

must fulfill certain conditions: to have a bachelor’s degree in the economic field and to have 5 years


of experience in financial area. The last piece in certification process is an exam organized by this

professional body.

TCO does not have an ethical code of conduct given its small size. Nonetheless, the values of the

companies are passed down by word of mouth.


4. Findings

This section presents the case findings and is structured into four sub-sections. The first sub-

section sets the scene by introducing the reader in the transfer pricing world and address the

terminology of ethics in the transfer pricing professionals’ view. The other three sub-sections are built

upon the theoretical framework and present my interpretation of the transfer pricing professionals’

perceptions of ethics. The theoretical framework presented eleven factors that give rise to numerous

ethical pressures in a tax environment. Nevertheless, as a result of the data analysis only four factors

seemed to be important, thereby the discourse would focus solely on the ambiguity in the tax law,

multiple stakeholders issue, reputation and risk management. Reputation and risk management will be

presented in a single section. In what follows the insights will be structured on the basis of these

factors and extensive quotes from interviews are included “to allow the reader to hear the interviewees’

voices…[and to]… allow the richness of the data to shine through” (O’ Dwyer, 2004, p. 403).

4.1. Introduction to the case

As transfer pricing is a complex and unknown subject for the people outside the transfer pricing

area, an introduction to the concept of transfer pricing and the important terms will be presented in

order to serve as a basis for understanding the results. In the second part of this sub-section the place

of ethics in transfer pricing practice will be discussed.

4.1.1. Short tale on transfer pricing

The history of transfer pricing can be traced back to 1917, when IRS was authorized to allocate

income and deductions among affiliated corporations and required them to file consolidated returns

(CliftonLarsenAllen, 2013). Later on, in 1930 was introduced the notion of “arm’s length principle”

that refers to the determination of transfer prices based on analysis of pricing in comparable

transactions between two or more unrelated parties dealing under comparable circumstances. This

principle is still the basis of transfer pricing regulations. The first notable transfer pricing debates at

European level were started in 1979 when OECD originally published its report: Transfer Pricing and

Multinational Enterprises (OECD Guidelines) that were also referring to the arm’s length principle.

In 1995 OECD released the OECD Transfer Pricing Guidelines following the previous reports

in transfer pricing in 1979 and 1984. The United States also released transfer pricing regulations (26

USC 482) in 1994 after previous transfer pricing guidelines with a White Paper in 1988. Both OECD

and United States updated the transfer pricing regulations with more comprehensive guidelines.


OECD updated the transfer pricing guidelines in the years 1996 and 2010 and currently is working on

the BEPS project that wants to address the flaws in the current transfer pricing regulations.

In the analyzed country within Eastern Europe the transfer pricing practice is relatively young.

Albeit the transfer pricing legislation appeared later, the transfer pricing consultants were engaged in

completing projects for multinationals that expected an introduction of transfer pricing regulations.

“I started doing tax because in 2006 when I started [to work] the transfer pricing team did not

exist…it was created around that time. At that moment there was not legislation nor

documentation requests. Transfer pricing documentation files were prepared only for

multinationals that came from outside and knew that they will need this.” (I2, Partner)

Transfer pricing is a complex and dynamic subject to which transfer pricing professionals were

not acquainted until being hired by a professional company in the tax department. There are no

“transfer pricing courses [in undergraduate studies] and somehow you learn how to do things from

the others, which can be ethical or not necessarily ethical.” (I5, Senior Staff). Transfer pricing is

presented as a concept during taxation courses, thus transfer pricing consultants are prepared

internally by the firms through trainings and on a daily basis through explanations by senior staff. A

brief view into what the field of transfer pricing means is highlighted below by one of the interviewees:

“Transfer pricing is a very dynamic field in which you cannot get bored, it is linked to many

sciences such as accounting, taxation, statistics, industry particularities, country specifics,

microeconomics, macroeconomics and now it starts to be linked even with the corporate social

responsibility part and to give something back.“(I1, Partner)

In transfer pricing the important part is how to determine the right price. OECD states four times

in its 2010 Guidelines that “transfer pricing is not an exact science” and thus “it will not always be

possible to determine the single correct arm’s length price; rather […] the correct price may have to

be estimated within a range of acceptable figures.” Also one must bear in mind that transfer pricing

“require the exercise of judgment on the part of both the tax administration and taxpayer”.

Regarding the determination of whether the prices applied ex-ante are arm’s length prices, the

OECD Guidelines present five methods. There are three traditional methods: comparable

uncontrolled price method, resale price method, cost plus method and two transactional methods:

transactional profit split method and transactional net margin method. One must attempt to apply the

methods in a consecutive order. To jump over a method a rationale must be presented and justified

in the report. The two most used methods in the transfer pricing practice are comparable uncontrolled


method and the transactional net margin method.

In applying comparable uncontrolled method, transfer prices practiced between related party

transactions are compared to prices practiced between independent party transactions. In order to be

able to apply the comparable uncontrolled method, the transaction occurring between two related

parties must also occur between unrelated parties. However, making the comparison requires

sometimes adjustments as there is unlikely probable that exact conditions (i.e. delivery conditions,

payment terms, purchased volume etc.) will be encountered in the same transactions. The most

common case of applying comparable uncontrolled method is when a related party that sells goods to

another related party also sells the same goods to independent parties.

According to the transactional net margin method, a profit level indicator (i.e. operating margin,

mark-up on total costs, return on assets, return on capital employed or berry ratio) is compared to a

range derived from profit level indicators of identified comparable companies (i.e. in case of the

analyzed country and most of OECD countries the range is considered to be inter-quartile range from

the 25th to the 75th percentile of the results derived from the comparable companies profit level

indicators).

Examples of how these methods are used in practice will be presented in the following section.

Now we move the discussion to the terminology of ethics in transfer pricing practice.

4.1.2. The ethical concept meaning

In order to understand the transfer pricing consultants’ perceptions of ethics, first we must view

what ethics mean to practitioners. Therefore, a particular question addressed to the interviewees was

how they would describe the concept of ethics. The most interviewees defined ethics as “fairness”,

“transparency” (I1, Partner), “honesty” (I9, Manager) and the act of being ethical as “the ability to

sleep well in the night with yourself” (I2, Partner), which can also be put under the capacity to have

the consciousness clean. This is a subjective definition so follow-up questions were put in order to

reach to the actual meaning and whether they consider ethics in performing their job. Another notable

definition of ethics is highlighted by the following quote:

“If you want to be ethical, this means to have a good image in front of the clients. If you have a

good image and you have credibility in this market this means that you succeeded in sending a

message and that it is heard.” (I9, Manager)

A peculiar finding from this exercise was that instinctively the interviewees started to describe the

concept from the point of view of the consultant - client relationship as emphasized by the following:


“To be fair in a way that I would not harm the other one, [...] the ones with whom I interact, in

the same time it can be a client or my colleagues.” (I4, Manager)

“Honesty among us, honesty in the relationship with the client and always play by the rules.” (I9,

Manager)

Further, an analysis of whether a distinction between ethics and law exists was made. All

interviewees agreed that the letter of the law may be sometimes unethical and that ethics is a smaller

part comprised in the law. They all recognized that there is a grey part out there which is legal but

unethical and referred to this as the interpretative side of the law. As the discussion progressed,

interesting insights were revealed on the real framework that guides the practitioners’ activity:

“Again the connection between morality and legality. It is moral not to pay your taxes? Yes,

probably it is immoral, but as long as the legislation allows, why won’t you?” (I6, Senior Manager)

“As long as the opportunity exists legally I don’t know if it is necessarily unethical, I mean it is

there because the business environment sees it but also because the tax authority sees it. If you

don’t want it there, take it out, you can’t blame someone, the one that benefits from a relaxed

legislation that the rule exists.” (I4, Manager)

“The thing is that business models develop faster than the legislation, which gives you a corridor

where you can create, everything in an approximate legal framework, on the principle that if the

law does not forbid, it allows.” (I1, Partner)

It seems that the letter of the law is the book of reference for professionals which is particularly

interesting as they all recognized a difference between legality and ethics. The following quote is clearly

revealing the commitment of practitioners to the law:

“I don’t have a problem in giving tax optimization solutions, so I don’t have a problem with this

but for example if a client to whom I have identified tax issues asks me to do the supporting

documents, to do the contract backdated and to sign and stamp it, I will never do this.“ (I1,

Partner)

“I don’t think anyone expects from you to be moral, I told you, I interact with systems […] and

these systems play you. It is clear that if you come with emotional opinions and explain them,

they will either fire you or laugh at you, in any way you don’t succeed in deliver. Their expectations

are definitely related to legislation.” (I7, Sole Practitioner)


In summary, this section discussed about the concept of transfer pricing which is not an exact

science, its short history and the most common methods to determine the transfer prices. Then the

discourse revealed that ethics means fairness, honesty mostly in relation to clients and colleagues.

Further inquiries about the distinction on ethics and legality showed that although there is a perceived

difference of practitioners between these two concepts, they do not act upon it as the legal provisions

are their preference, as are their clients’ expectations also. The transfer pricing consultants are

therefore somewhat limited to the law given that if they would say that the transfer prices are not

correct and adjustments should be performed, then their clients would come and ask the legal grounds

before making the requested adjustments, legal grounds that are of course almost always in the grey

area given the artistic nature of transfer pricing.

4.2. Ambiguity in the law

In this sub-section I analyzed how the ambiguity in the transfer pricing legislation stands on the

creative side of transfer pricing and thus bounds practitioners to “letter of the law” thinking, which

provides some sort of flexibility. Next, the additional reasons for this flexibility are presented under

the form of regulators and professional bodies.

4.2.1. The artistic side of transfer pricing

In the previous section it was mentioned that transfer pricing is not an exact science. In this part

I will explain why there is a claim for this and provide examples of how this aspect of transfer pricing

is represented in practice.

The interviewees outlined that transfer pricing is a dynamic and highly technical field, and that

legislation does not cover well its particularities, nor does provide specific rules to create a pattern on

handling with certain things. The subjective nature of transfer pricing was brought into discussion due

to the lack of relevant information to make an objective analysis. The practice of transfer pricing was

allegorized to an art due to its permissiveness for creativity of transfer pricing professionals.

“In countries where TP documentation is made mostly and [TP] planning only on rare occasions,

the ethics does not come around so often, even more as TP is quite subjective, the informational

market is not developed enough that you can find the perfect comparable. You can find at this

moment some information to compare one company to another, but you can’t find information

with the perfect comparable and yet there are no mathematical methods so you can be able to say

that this is the exact price at which you should have sold [some goods to a related party] without


making any error… it’s extremely subjective, it’s more artistic.” (I5, Senior Staff)

It can be observed that due to the transfer pricing subjectivity, generally no one can tell for sure

what is right or wrong, implying that there is no place for ethics in this area, consistent with the claims

made by Doyle et al. (2009) that there is no place for ethics in tax area. Also the artistic nature of

transfer pricing and lack of exact regulations leads the transfer pricing specialists to do their best in

order to defend their clients’ interests:

“The beauty of transfer pricing comes from the fact that it is not an exact science and then if you

can argument well that the respective transaction was incidental, that the cost was this and that

you can’t compare with x,y,z because they are at a different development cycle and that you have

to compare with a,b,c, and you manage to defend them, I am fine, I do not have any ethical

problem with this stuff, as long as I can argument and can defend my work in front of tax

authorities.” (I1, Partner)

The artistic part of transfer pricing mentioned by the interviewees refers to the fact that taking

into consideration the complexity of business models and country specifics, the regulators were not

able to form a specific legislation. Rather they formed general guidelines (i.e. OECD Guidelines) that

are sometimes included in Member states legislation or, as in the case of the analyzed country as a

reference for all other issues that are not comprised in the legislation. These guidelines provide general

advice, but do not list rules or specific methods of computation, which leaves enough room for

creativity and professional judgment.

In the previous section it was mentioned that in transfer pricing practice two methods for

determining the arm’s length price are used on a more frequent basis: comparable uncontrolled

method and transactional net margin method. The first method seems straightforward but can also

leave room for creativity. In applying the comparable uncontrolled method a comparison is made

between the transactions occurred between two related parties and the transactions between two

independent parties in order to verify if the related party transactions are at arm’s length. The arm’s

length principle is defined in the Article 9 of the OECD Model Tax Convention:

where “conditions are made or imposed between the two enterprises in their commercial or

financial relations which differ from those which would be made between independent enterprises,

then any profits which would, but for those conditions, have accrued to one of the enterprises,

but, by reason of those conditions, have not so accrued, may be included in the profits of that

enterprise and taxed accordingly.”


In other words, the terms, conditions and pricing of transactions between related parties should

be the same as those that would be applied to third parties undertaking similar transactions. So usually,

in applying this method to defend a client for a post-factum transaction, transfer pricing professionals

compare transfer prices with prices between independent parties. A particular example of an

application of comparable uncontrolled method refers to a transaction of sale of goods by an external

related party to the local analyzed party. The external related party had also sold the same type of

goods to independent parties, thus there were comparable prices in similar conditions, but the transfer

prices were higher than the prices for goods sold to independent parties, which would indicate shifting

of profits outside the analyzed party’s operating country. In order to defend this, an average transfer

price was computed for the transactions between the two related parties that was compared to the

interquartile range of the prices with independent parties. The average transfer price fitted in the

interquartile range. This represents a bending of arm’s length standard which requires that same prices

be applied both in relations to related parties as independent parties as the prices used in transactions

with independent parties are a result of market forces.

Regarding the application of the second method - transactional net margin method - things are

even more creative. According to this method, a sample of comparable companies must be obtained

in order to compute an inter-quartile range on their profit level indicators. To compute the inter-

quartile range, a profitability level indicator is chosen depending on the transaction’s particularities.

One of the related companies participating in the transaction is chosen as a tested company. The profit

level indicator of the tested company is compared to the interquartile range of the profit level

indicators of the selected sample of companies. It is recommended that the profit level indicator of

the tested company should be at the median but arguments can be put for a setting below or above

the median.

One must bear in mind that the process of obtaining a sample of comparable companies on which

the inter-quartile range is computed is not governed by clear rules but by established practices in the

consultancy firm. In order to obtain a sample of comparable companies a benchmarking study is made.

A strategy is build in order to extract data from databases. Depending on the type of transaction that

is tested, a different database is used. For loan transactions Deal Scan database is used, for licensing

intellectual property rights Royalty Stat database is used and for usual transactions (e.g. sale of goods,

provision of services or manufacturing of goods) Amadeus database is used. The creation of the

strategy is the first step to extract data from databases that would be further on processed. There is

some brief guidance in the legislation but creative data management can be used in such a way that


two persons thinking to build a strategy may obtain different sets of data or multiple strategies can be

designed to fulfill a certain objective:

“[…] in the moment when you provide the services, you apply a professional judgment. The

reality is that you can apply the same judgment in multiple ways. For example we had a client that

needed a certain result and it was needed to investigate the possibilities in which applying a

technically correct and procedural judgment the respective result can be obtained, having the

same database available. And by making many simulations and observing how you can approach

the issue you see if you can obtain the expected result. We had two alternatives: one that led us

to the expected result and one that did not. The point is that neither one nor the other was wrong,

both were correct, both were ethical, compliant with the law, criteria to do a benchmarking study.

The thing is that you have a database from where you start, in this case Royalty Stat and some

contracts that you find using specific search keys. In the first version you obtained some contracts,

in the second one you obtained almost the same contracts plus other contracts that helped you.

The ones that helped you did not appear in the first scenario because the strategy did not have

those search keys, but this does not mean that those contracts were not good for your analysis.

This does not mean that you should not investigate all possibilities in order to see what is there

in the database and how you can obtain a larger sample and that is more representative for your

case. We did not give to our client a benchmarking study that was not compliant with our quality

standards, technically incorrect or else. It’s just that applying different steps you obtain different

results.” (I4, Manager)

After the design of the strategy is made, a manual selection follows to correct for potential biases.

Companies will be searched online to check whether their activity corresponds with the activity of the

tested company. Once a final sample is obtained, the profit level indicator has to be computed for

multiple years, but there is not specification on how many years the analysis should be made, in

practice being used three or five years periods. After a period was selected, pool or weighted average

method is used to compute the interquartile range. The pool method takes into consideration all years

of the individual results and thus gives a larger set of profit level indicators while the weighted average

method makes a weighted average of the profit level indicator for each company and for the whole

period and has fewer profit level indicators on which to compute the interquartile range, which often

leads to a narrower sample. There is no specific requirement for using either one method or the other,

therefore in practice it is used the one that gives the results that would help the client.


“There are no established methods to do things, they are extremely varied mathematically

speaking and not only. Think that inclusively mathematically speaking there are different methods

do to the analysis, not to speak about qualitative things. For example you can compute the

interquartile range with 2 methods: pool or weighted average, one of them leads to a narrower

results sample and the other one to a large results sample. What is more, there are at least 12

methods to compute this interquartile range.” (I5, Senior Staff)

A typical example of this method’s application is a transaction of provision of IT services by the

tested related party to an external related party. Usually on the internal market independent IT

companies obtain a profit margin of at least 10% and it was a case when a client wanted to be defended

for a profit margin of only 5%. In order to obtain such a margin the consultant looked for a way to

argument the necessity to make the search at the European Union level and not at national level as

the margins are lower within European Union. Therefore the argumentation takes the place of rules:

“Considering that transfer pricing is not an exact science this means that it will never be black or

white in a certain situation, but an argumentation issue, and as long as the argumentation you put

is convincing in front of the authorities, that means that is also fine for the client.” (I9, Manager)

One interviewee recognized that this lack of indication by regulators of the methods to be used

in practice is creating distortions and allows practitioners to defend the clients:

“The OECD guide does not mention to compute interquartile range, this is a practice that

formed, the OECD guide says in the mentions part that statistical analyses have to be used to

obtain a central tendency and they give as example that inter-quartile range may be a good method

but they do not explain. In fact in our legislation it is written indeed that you have to use inter-

quartile range, but this is something that was taken over from the United States legislation, from

US practice. And in the US practice it is written that when you compute the interquartile range

you have to use mini tab methodology to compute the interquartile range. They say when to use

pool method or weighted average method and from what I have read they have a preference for

pool method. So here in Europe they left it more vague, maybe because the habitat is more

diverse, but I think that at least at the sample level the mathematics technique set should be

defined, […] because otherwise, how to say, you can play it so creatively that you can defend

almost everyone.” (I5, Senior Staff)

This quotation emphasizes the opportunities transfer pricing gives to a professional company to


defend its clients while following the letter of the law. It is clear that the law does not catch the

necessary rules for establishing a good and sustainable practice of transfer pricing. The following quote

is particularly worrying for developing countries:

“We are opinion formers as transfer pricing is a technical field and when you refer to a country

where transfer pricing practice is pretty limited, I am not speaking about legislation rather about

the limitation of practice, you as a transfer pricing specialist can influence how this issue is seen.”

(I1, Partner)

Therefore, it can be stressed that transfer pricing professionals have the knowledge and experience

to influence this practice, which in essence is an artistic one and gives consultants the chance to

exercise their creativity, professional judgment and flexibility. It is clear that the transfer pricing

professionals’ behavior is guided by the limits of the law. Nonetheless, when tackled upon unethical

issues the concept of economic substance emerged. It seems that the artificial transactions are the

unethical part of transfer pricing practice according to the interviewees:

“The economic substance is the thing that is missing usually in very aggressive tax schemes. […]

Here I see the ethical component, not to say that is 5 or 7, because here you can play with them

and let’s say that we have a considerable experience about which is the value range you can play

with or how you could make a study, but in the moment where knowingly you choose to propose

o scheme that you know it does not have an economic substance, this is where I see as an unethical

behavior.”(I2, Partner)

However, recently an artificial transaction ban has been introduced into the national tax

legislation. The following concept clearly illustrates that the economic substance problem is just a

matter of legality:

“[…] if you know that the only purpose is to not pay taxes I think that is an ethical matter, but if

you can give it a form and the client is willing to implement a structure that has [economic]

substance and all the companies to be active in that structure, then the things become legal.” (I6,

Senior Manager)

To summarize, the lack of strict transfer pricing rules is what leads to the artistic nature of transfer

pricing. Moreover, the fact that the transfer pricing specialists are specifically hired by the companies

(and not by the society), while there are no clear rules, constrains the transfer pricing specialists to

guide their behavior based on the limits of the law and clients demands. Therefore, due to this situation


it can be claimed that there is no place for ethics in transfer pricing as this area is surrounded by

subjectivity and is difficult to differentiate right from wrong. Next, the discussion focus moves to

other factors that enable the transfer pricing specialists’ behavior: regulators and professional bodies.

4.2.2. Regulatory issues

This sub-section discusses the role of regulators in enabling transfer pricing professionals’

behavior. An interesting aspect has been highlighted in the interviews by one interviewee regarding

the role of governments in maintaining the transfer pricing situation:

“I think that here when you speak about Starbucks case or Google case you get to the tax political

battle between the states, it is not necessarily because of the business environment but actually

because Ireland, Luxembourg or Netherlands had some tax facilities that made all these giants

decide to move in that country [..], and so you get with the ethical side on the government’s side.“

(I1, Partner)

This quote stresses that the opportunities that multinationals embrace appeared as a result of

governments’ decisions and one may also question the ethical commitment of these parties. One may

think upon the differences in tax provisions of the countries and reflect on the hidden reason behind

demanding lower tax rates.

There is an international awareness of transfer pricing legislation gaps and there is a lot of work

ongoing to solve this issue. One of the interviewees expressed his view about these grey areas and

pointed out that these are not glitches of regulators’ reasoning:

“[…] the duty of the state in its quality as a regulator is to create some laws that are clear and that

do not generate grey areas. The bad part is that anyway globally the laws are given for certain

businesses and so these grey areas often are not native but created…so you reach in this situation

where the thief calls out the thieves, that [that law] actually it was good but now when it is good

for everyone, we have social pressure that asks where is the money.” (I9, Manager)

Regarding the current endeavor of OECD to limit the transfer pricing loopholes through the

BEPS programme, transfer pricing professionals expressed their concerns regarding the outcome of

this project as it is difficult to create a harmonized framework due to the specifics of each country. It

is expected that eventually the new guidelines will rely on professional judgment in order to tackle

specific situations.

“They try, it is this BEPS programme where they come with diverse things, but the OECD has


its limitations. Once that all the decisions that it makes are mandatory only to the Member States,

the rest can do as they please, on the other hand the progress is pretty difficult for every country

as each one is specific. They try to make a general framework but it will still need adaption to the

local environment as you can not point all possible situations at a certain moment. You can create

a general framework, but probably the OECD will make with this BEPS programme what it did

with the OECD Guidelines regarding transfer pricing: to offer some general principles after

which you can guide, but actually is a big component of professional judgment. (I9, Manager)

Regarding the national environment, some tax practitioners expressed the view that the Revenue

authorities are behaving in an unethical manner. They lack sufficient training and they request

additional unspecified analysis to be convinced of the arm’s length of the transfer prices. As mentioned

earlier, there is no transfer pricing preparation during studies. Therefore trainings are organized at the

workplace. The problem is that within the tax revenue authority, there are no transfer pricing

practitioners that can explain clearly the problem and taking into consideration that transfer pricing is

quite a technical and interpretative subject the tax inspectors are insufficiently prepared to verify the

taxpayers.

“On the other hand there can be another ethical problem in the sense of lack of sufficient

preparation of a tax inspector. What we are confronting with right now is the fact that the tax

inspectors come and audit a company for transfer pricing issues but they do not know how to

investigate this issue. They have done some trainings, they understood something but they do not

have a complete picture in the sense that they do not have a well documented knowledge, thus

they develop a reasoning that is not ok but neither are willing to accept that what they said it is

not ok nor listen to you. (I4, Manager)

Other issue expressed is the lack of help from revenue authority for taxpayers in order to inform

them about requirements and provide advice for compliance. It was discussed that the revenue

authority does not engage in taxpayer information processes and that often leads to failure of

compliance.

“The issues we usually identify are not generated by bad will, but in 99% of the cases they are

generated by bad information or by the fact that people acted in the way they thought it was the

best. Here I return to the connection with the revenue authority that should have done better its

job and inform the taxpayer about the rules to be obeyed.” (I9, Manager)


Another interviewee highlighted the negative consequence of this attitude:

“[…] unfortunately here the state is the sanction control not the help control. I refer to the fact

that maybe you did not understand very well how to apply certain stuff, the state should come

and worn you, teach you, not in the moment you have contacted them they give you a fine. […]

and when you see this unfair attitude, you are tempted to think how you can do to not pay this

state that does not help me in any way.” (I3, Sole Practitioner)

Moreover, the tax inspectors are being remunerated upon establishing additional amounts to

taxpayers during tax audits. Some interviewees expressed that this measure often leads to

aggressiveness from the tax inspectors.

“It is pressure from above. The director does not believe the inspector that audited [the taxpayer]

that he did not find anything. He either says that the inspector was incompetent or unethical.

Therefore the inspector must find something, and some of them are really aggressive tax

inspectors.” (I3, Sole Practitioner)

The lack of transparency of the public money was reminded for reason of temptation to minimize

tax liability. This may also cause lack of awareness towards indirect beneficiaries of the tax payments

– the society – and creates a sole responsibility only for the clients as they may be able to reinvest the

money obtained from tax liability minimization and create new jobs. Below are two examples of

interviewees’ opinions regarding role of transfer pricing in harming society:

“No, I don’t think about it, because here is no public money transparency.” (I3, Sole Practitioner)

“[…] here this thing to be right for society is not so entrenched. […] is not so big the awareness

on this thing [corporate social responsibility] at least not in consultancy.[…] Basically you think

that if your client is happy with your deliverable is fine, the fact that you managed to help him

not to be penalized for ex-ante actions is even better.” (I4, Manager)

This sub-section highlighted the role of regulators as enablers in the current transfer pricing

situation. It has been argued that the grey areas in transfer pricing appeared as a result of regulator’s

decisions and therefore there must have been some hidden interests. Moreover, among the European

states there are different tax rates which created an inequality between countries and a motivation for

multinationals to move their operation activities in countries with lower tax rates that led to a political

tax battle. Regarding the current OECD project there is a concern about the final outcome of this

endeavor as it is difficult to create a harmonized legislation. Regarding the national regulators, there


were claims about the lack of training of tax inspectors in the transfer pricing field, the lack of

compliance advice given to the taxpayers and finally bad performance measures are used to evaluate

tax inspectors. Lastly, the absence of public money transparency may count as a motivation for

minimize tax liability.

4.2.3. Professional body issues

The professional body governing the tax practitioners within the analyzed country has a brief

history and a brief ethical code of conduct. The ethical code of conduct is narrow and does not

mention the fundamental principles a practitioner must follow in relation with other stakeholders –

e.g. society – but focuses mainly on preserving the image of the profession. Among the interviewees,

only five are members of this professional body and some of them were not aware of the content of

this ethical code of conduct, guiding mainly upon personal values.

Moreover, it appears that the professional body is a hidden presence in the lives of tax

professionals as they are not involved in the practitioners’ activities.

“ Unfortunately in our country, or at least this is how it seems to me, this professional body of

the tax advisors is not present in my activity, I just play some taxes to them each year and that’s

it.” (I2, Partner)

The professional body is considered to be a label provider that makes a presence when they

receive the certification and every year when they have to pay the annual fee. It was stressed that the

professional body may cause competitions distortions due to its inexistent enforcement of the ethical

conduct:

“The stuff with professional bodies, at least in our country is that they are just tax collectors, they

do not help you in any way. Basically you have to pay to have the tax consultant etiquette, but

they do not come to help you with ethics or discipline you by coming in an audit. Audits are just

formally. So you stress to be perfect but you have competition that is not perfect and in the end

it outlives you. They should give access, then continuous training, then control, in the sense that

who is a tax consultant should be with prestige, but in our case after you gain access to the

professional body you can do as you please. And if an audit comes they ask you how many

standards have you bought. It does not matter if you have read or applied them. So in our case

they don’t help you in any way.“ (I3, Sole Practitioner)

As this professional body does not engage in appropriate check-ups of their members or their


ethical commitment, its restrictions are not visible for practitioners. Furthermore, there is a belief that

the system can be fooled by bad intended people. One may reflect upon the results of this behavior

for building a long-lasting and ethical profession.

“Normally, when you are a member of an organization, you are obliged to follow the ethical

code, and if you don’t follow this code, the other members or the organization might call to

account, to put your case for analysis at the Ethical Committee or be suspended. But I don’t know

if the ethical code is an actual barrier for those that want to be unethical. I think you end up to

what a person is made of. Here you end up eventually because who wants to f*** up the system,

will f*** up the system and will find a way to do in such a way that he will not get caught or get

caught really hard.” (I1, Partner)

There was also an expressed concern regarding the profession view. In this analyzed context the

tax consultant profession is relatively new as the professional body was founded in the early 2000s.

Therefore, until the appearance of this professional body, on the internal market there were only

accountants and auditors. As accountants prepared also the tax advice, the start of the tax consultant

profession threatened their work as a part of it was being outsourced. Besides, in order to continue to

do tax advice they had to enroll to a different body and be re-examined. Thus, some conflicts arouse

and a compromise had to be made in order to solve the dispute: all accountants could enroll to the

tax consultants’ professional body by going to an interview. From the opinion of some interviewees

these conflicts worsened the image of the profession as the public could not see the value added of a

tax consultant as an accountant could do the same job.

“In other countries I think tax consultants have indeed a better position. Here it began later, they

postponed it until they founded the professional body, until they gave it some attributions and so

on. And because tax consultants came later, the accountants felt threatened as they felt that a part

of their work is taken, because implicitly they made tax advice. […] And from this small conflicts

I feel that this tax consultant profession decayed in the public’s eyes. [...] The point is that initially

the exams to access the profession were very hard. Now probably they are easier, it is not so hard

to pass anymore. And there are people that become tax advisors that don’t know how to interpret

the fiscal code or to read between the lines. And many times they give wrong opinions. And

automatically by the fact that the most part of the consultants give wrong opinions or if they do

their jobs they do on small fees, it ruins your reputation that you are an elite that makes the things

as they should be done.” (I6, Senior Manager)


To summarize, this section revealed that the lack of clear transfer pricing rules led to the

emergence of the artistic nature of transfer pricing. Through this artistic nature consultants make use

of creative data management to defend their clients in the limits of the law. Furthermore I revealed

additional factors that may influence this transfer pricing professionals’ behavior: the regulators and

professional bodies. In the case of the regulators, the tax political battle was reminded as a reason for

the actual transfer pricing situation. The grey areas from legislation are a result of government’s

decisions and there is a belief that the current BEPS programme will not lead to improved standards.

Specifically, the national environment is being charged for lack of transfer pricing training of the tax

inspectors, lack of information provision to taxpayer regarding compliance, wrong performance

measures for evaluating tax inspectors and lack of public money transparency. At last, the professional

body is a hidden presence in the lives of transfer pricing professionals and does not commit to

enforcement of ethical conduct due to its lack of comprehensive audits. In addition there is a belief

that the tax practitioners profession has decayed in the public eyes due to the rough beginnings of this

tax professional body.

Given that transfer pricing professionals represent the bridge between the taxpayers and society,

an analysis of the perceived responsibilities of the transfer pricing consultant follows.

4.3. Multiple stakeholders: conflicting demands of tax professionals

Another factor that may lead to ethical dilemmas refers to the multiple responsibilities issues that

tax professionals have to confront with. It is well known that tax practitioners have responsibilities to

multiple parties: clients, colleagues, professional body, revenue authority and society. The interests of

these stakeholders are divergent and it is thought that the perceived need to satisfy these different

interests often leads to ethical pressures. In addressing this issue interesting insights were revealed.

In transfer pricing practice this conflicting demands issue that may lead to ethical dilemmas is

inexistent. There is an acknowledgment that all these needs can not be fulfilled. Also there is no ethical

pressure due to the perceived need do fulfill all these responsibilities.

“As a consultant it is clear that you can not please everyone. And you end in the situation when

you have to please the one who pays you.” (I9, Manager)

“As long as I can help a client, I will help him. I am not interested in ethical stuff and I don’t

think that is anyone bothered by that. The client hires me to help him, not to give morality

lessons.” (I5, Senior Staff)

“The morality is a luxury that can be afford only by the company’s policy makers.” (I7, Sole


Practitioner)

They chose to focus on the client advocacy role as it is more salient in their activity and is a big

component of their business continuity. All interviewees put the responsibility to the client and the

firm on top, while the responsibility towards the tax authorities was acknowledged only by one

interviewee. Regarding the responsibility towards the professional body some interviewees expressed

their concern towards respecting the rules of the profession but taking into consideration that the

professional body’s control is limited and the ethical code of conduct is more a façade, this

responsibility is more related to reputation. At last, the responsibility towards the society is almost

invisible for transfer pricing professionals, which may be caused by lack of public money transparency.

Hence the primary role is devoted to clients as the consultancy fees have to be worthy.

“No client would pay you, I mean he does not see the value added when you give him a transfer

pricing documentation file in which you put there for the tax authority his issue, you don’t try to

defend the client in any way but simply you offer the tax authority the argumentation in order to

be able to make transfer pricing adjustments or to put the tax structure in danger. Indeed it is an

ingrate position, but we are in the position in which we do not judge, we try to help the person

who pays us in the legal and ethical limits.” (I9, Manager)

An ethical dilemma related to defending the bad intended clients was asserted by some

interviewees.

“We definitely have clients that come and ask us to defend certain business models through the

transfer pricing documentation file, business models that we consider wrong from the

beginning…the type of business model in which an empty firm from outside charges an extremely

high royalty from the turnover [to an internal related party] with the purpose to artificially shift

the profit from the country. Here you have a dilemma, and you have to think what are you doing?

You tell the client that you cannot do the transfer pricing documentation files because you think

it is not fair what he does or you do the transfer pricing documentation file because this is your

job after all. I think after all this is also the lawyer’s dilemma, you know the client is guilty, you

must defend him or no?” (I2, Partner)

It is interesting to observe that an ethical dilemma does exist which means that their ethical

reasoning is intact, but the real concern is that the easy course of action is chosen. The realization of

owns sense of duty is accomplished through giving recommendations to the clients:


“I personally consider that they don’t do well how they do, but I feel that is my duty to try to

defend them but always I tell them without hiding this stuff. I tell them because I realize that it is

wrong what they do and they must be aware that there is a risk at a certain point that someone to

come and tell them this stuff. And we make them a defense to the best of our ability but however

our recommendation would be to change something to their business model” (I2, Partner)

Indeed, the interviewees demonstrated a limited sense of responsibility towards the actions

undertaken by the clients. They see themselves as executors of clients’ inquiries but free of any

responsibility towards the final decision as they are not part of it. They hide themselves under the

cover of presenting the relevant information and making recommendations to their clients and shift

the ethical responsibility in hands of their clients. It was argued that the decision depends on the risk

appetite of the clients and does not involve them in any way:

“When I make a TP policy I give him the interquartile range and my recommendation. The fact

the client chooses one thing or the other, he knows the risk. I consider myself in good faith. I

cannot influence the shareholder or the CFO’s decision, I can say only the risks, but personally I

get angry as it does not seem fair to me.”(I1, Partner)

“The duty as a consultant the most of the times is to explain the client to understand, to be able

to take an informed decision and on the other hand the decision is linked to the risk appetite of

the client not of the consultant, because you as a consultant can have a certain opinion but the

client is not obliged to share it. […] In our capacity as consultants we don’t see ourselves as

someone’s parents, I mean we cannot oblige someone, we no longer can educate someone but in

a limited amount, but generally in this transfer pricing area you end up advise or talk with people

with 20 years experience in doing business and you as a consultant can only state your opinion

but the client definitely has his own opinion and knows how he wants to do. It is hard to change

your client’s opinions, you can just state your view and that’s it.” (I9, Manager)

The realization of owns sense of accountability is particularly clear here:

“As long as this is regulated and the taxpayers know what the maneuver margin is, they decide

by themselves what risk they are willing to take in their business model. My duty as a transfer

pricing consultant is to present both the options through which they can make tax optimization

and the risks linked to this, such as a transfer pricing adjustment risk, the risk of preparation of

certain explications. As long as I know that I have presented both sides of the coin, risks and


advantages he can obtain from a transfer pricing planning, it is just his decision regarding the

implementation. From my ethical point of view, I consider myself correct as I have presented all

the risks.” (I1, Partner)

Legal boundaries are again highlighted here by the interviewees. The transfer pricing professionals

expressed their commitment to follow the letter of the law, but having in mind the artistic side of

transfer pricing, they are able to bend often the law in the favor of their clients. In case of illegal

inquiries on behalf of their clients, the interviewees stated convincingly that their position is assertive

and clearly communicated to their clients. Also, as their primary advocacy role to the client they

consider is their duty to present the risks and make recommendations. This is seen as an honesty

matter as later tax audits may bring transfer pricing adjustments, which will impact the clients’ activity.

“During projects there are situations when you are asked certain things. And again there are

situations when you must know to keep the distance and not be afraid to tell the client that you

do not engage in certain things such as making signed backdated documents. So you must know

when to say no to a client and explain him that we have not agreed certain things and we will not

do it.” (I2, Partner)

“We did some benchmarking exercises in which the client came and told you that he wanted to

make a service center in our country with a remuneration of cost plus 5% for these services. And

if you really know that cost plus 5% is a low price for those type of services you make the

benchmarking study to be ok for the cost plus 5%. But again you tell him that it may not be ok,

he bears the risks if he wants to go forward, if he doesn’t want it that’s not my pidgin, I help him

and say to him that the benchmarking study helps him if you look from a certain position to the

numbers, but there is a possibility that someone else will not agree and looks from a different

angle and then adjusts the transfer pricing. But it is his call if he wants to go forward or no.” (I5,

Senior Staff)

Moreover, there is a rationalization of the client’s advocate role and consequences are perceived

to be indirect and insignificant. This action is justified through their responsibility to fulfill their

primary role:

“In what we do, it’s all about money flow after all. We don’t do operations, we don’t do security

systems for cars, I mean this thing with the sufferance is somehow an indirect subsidiary

somewhere.” (I2, Partner)


“You wonder if it is moral that the consultant to propose an option that is unethical towards the

society, but this is his job after all” (I6, Senior Manager)

To summarize, the perceived need to fulfill multiple responsibilities is inexistent in the case of

transfer pricing professionals. They are somehow constrained to focus solely on client duties and

accomplish their responsibility towards the firm given their connection between company’s survival

and pleasing clients. There is a realization of owns sense of duty through presenting the relevant

information to the client while transferring the decision responsibility into the client’s hands. The

limits within they are an advocate of their clients are reinforced here as there was an acknowledgment

of defending clients within the limits of the law. In what follows, the risk management and reputational

issues will be investigated to complete the transfer pricing professionals’ activities picture.

4.4. Risk management and reputation

This sub-section approaches the risk management procedures existent within TCO and the

reputation as a factor that leads to ethical dilemmas.

4.4.1. The risk management procedures

TCO is a small company with unwritten risk management procedures. However, they use risk

management procedures in managing their day-to-day activities. The risk management procedures are

known by senior staff and passed further to other members of the team through word of mouth.

Generally they have three big risk management procedures divided into project phases: (i) before the

start of the project: careful assessment of the potential client, (ii) during the project: inform the client

about relevant issues and (iii) at the end of a project: send a memorandum to the client with the risks

identified.

The first risk management procedure refers to the verification of client against things that could

affect their reputation such as law problems, unusual field of activity etc. In this part it is important to

know the person you sign a contract with as no one would like to associate the company’s name with

doubtful clients. The following quote highlights the reputational issue:

“[…] after a meeting request to discuss a potential collaboration with certain clients we decided

not to work with them because their behavior on the market was related to tax evasion. And we

did not want to be associated with them. […] This is part of our risk management procedure

where we search after company, after shareholder and administrator. We do our research when

we are not familiar with the company and then we take a decision whether we accept or not to


work for them.” (I1, Partner)

After accepting the client, the engagement letter is also an important part, as there are mentioned

the responsibilities of the consultants and the limitation of their services, which may help them in

future disputes with clients. During the project an important risk management procedure is to always

keep a close communication with the client and inform him in due time about potential issues that

appear during a project. Issues refer to risks for the client that could appear at a later stage or issues

that impede practitioners to argument that the transfer prices were according to the arm’s length

principle. A notable mention in this part is that the communication should always be kept also in

writing in order to avoid future conflicts. The following quote affirms that this also means a shift of

responsibility towards the client as the obligation to pass on the information has been met:

“Risk management in consultancy helps you to avoid being associated with things you don’t want

to be associated with, and secondly is a derogation of accountability towards the client because

you told him. It is his problem how he reacts.” (I9, Manager)

The third part is linked to the risk management procedure done during the project with the

distinction that it is structured in a report form and it is sent alongside with the final transfer pricing

documentation file. The report has the role to present the issues identified as the transfer pricing

documentation file is a defense file that is presented to the tax authorities and thus can not present

issues that the client do not want to share. As it is highlighted in the following quote, this

memorandum also serves as a defense mechanism for consultants as the clients could come back and

argue upon future transfer pricing adjustments:

“[…] then is the idea with pointing out the risks, as the transfer pricing documentation files that

we prepare do not cover the risks because they are not done in such a way to describe risks…so

it is important to point out the risks separately to the client without being afraid that you may

displease him, you must say clear what you see. And this is something through which you ensure

because eventually the client may come back and tell you that the transfer pricing documentation

file did not pass with the revenue authority. Then you can say that you have told him in the letter

that there is a big problem and that the file may not pass as the transfer prices are not right.” (I2,

Partner)

Some interviewees made a connection between risk management procedures and ethical behavior,

in the sense that risk management procedures impede unethical behavior:


“I think there is a direct relationship between risk management and ethics, as long as your risk

management procedure is more loose and you are not interested for who you work, how you

work, the trap to be drawn into doing unethical stuff is higher.” (I1, Partner)

All interviewees discussed about the importance of risk management in the transfer pricing

practice. Almost all of them saw a link between the existence and respecting of the risk management

procedures and the company’s reputation.

4.4.2. Reputation

In its quality as a small firm on a competitive market, the reputation is the most important

intangible asset and they are keen in preserving a good reputation as this means business continuity.

“Ethics plays a very important role in provision of professional services generally speaking not

only transfer pricing. I mean is not something strictly linked to transfer pricing, but is a very

important subject. I like to believe that I never willingly did or do something that breaks an ethical

principle to win on the short term some money as a consultant because these are the kind of

things that destroy your reputation if they are found out at the certain point.” (I2, Partner)

Moreover, most of them associated the ethical dilemmas to situations when they relied on the

risk management procedures to avoid unpleasant situations. The ethical issues refer to accepting a

certain client or starting to provide a different type of service: tax expertise on transfer pricing

documentation files which mainly refers to acting as a third party in a legal dispute over a transfer

pricing analysis and state your opinion about the accuracy of the analysis. They recognized that there

was some thought about it and decided to not engage in something like this, as they would reach to a

situation with no exit since they would be pressured in acting without sufficient information,

insufficient resources. In the following quote the relationship between ethics and reputation is

emphasized, which is consistent with findings of Doyle et al. (2009) on a study of tax practitioners

that presented that reputational concerns impede tax practitioners in engaging in unethical behavior:

“It is such a dynamic field and full of sharks that once is enough to make a mistake that is not

covered by rules or at some point to occur an unethical attitude from you and in maximum 3 days

the information spreads so the whole market knows. Then you get out of the business, you self-

exclude. It is a simple matter, this is how the industry works.” (I9, Manager)

The reputational risk is emphasized by the interviewees when refusing clients. Besides, some of

the interviewees used the word ‘control’ when referring to refusal of projects in the sense that they


refuse what they cannot control. Regarding the tax planning, ‘hard to defend’ was the concept that

emerged as a reasoning for proposing certain tax solutions. This makes it more clear what things are

taken into consideration by transfer pricing professionals when making a decision.

“And we refused due to this reason, because there are many cases that you cannot control, and

you cannot refuse afterwards. And there are many cases which are not ok, you realize that they

are not ok, there things have happened and we don’t want to be [involved in such things].” (I1,

Partner)

“What we think reasonably would not pass we do not propose from the beginning, the transfer

pricing documentation file is a version that comes post-factum, but there are situations in which

clients require us to do a transfer pricing policy, to say them how much should the transfer pricing

be and here we avoid to propose very aggressive solutions in the sense that we believe it is hard

to defend we do not propose.”(I2, Partner)

According to the former TCO employee the reputational risk is actual a façade for loss risk. He

argued that behind this reputational risk is actually a risk to lose the case in front of tax authorities.

“They do no want to take a difficult case, they do not want to assume a risk, a risk of losing the

case. Because this is what actually means, big 4 firms and the others refuse the cases that they are

not sure they will win, not because of reputation. That they put it into reputation and in damaging

the reputation, but actually this means: what is the case? A + b + c, it is clear that we lose, we

don’t take it.” (I7, Sole Practitioner)

In summary, the risk management procedures of TCO can be divided in three big components

depending on the project cycle: before the start of the project, during the project and at the end of a

project. Through risk management procedures, transfer pricing consultants shift the responsibility and

information to their clients. Also there was a recognition of a direct relationship between risk

management and ethics in the sense that risk management procedures impede unethical behavior. A

further link is made between the existence of risk management procedures and preserving the firm’s

reputation. The reputation is the most valuable intangible asset of TCO, this being the reason for

refusal of projects. The reputational risk is listed by consultants as a reason for refusing clients as these

clients would request unethical behavior which may ruin TCO’s reputation. Nevertheless it was argued

by an interviewee that reputational risk may serve as a façade for rejection projects that are impossible

to defend and thus would bring a failure to the company. An additional link between reputation and

ethics was highlighted as being seen ethical in the market implies business continuity.


A schematic summary of the findings is presented in the figure 3. According to the findings of

this study, transfer pricing professionals’ activity is oriented towards defending their clients as their

business continuity depend on this. However the activity of transfer pricing specialists is compliant

with the transfer pricing legislation. The ethical behavior of the transfer pricing professionals is

impeded by three factors: artistic nature of transfer pricing, regulatory issues and professional body

issues. There is a strong concern for risk management (“RM”) procedures as this helps in maintaining

a good reputation on the market. Further on, reputational concerns help professionals to keep a

distance from engaging in unethical behavior.

Figure 3: Summary of the findings


5. Discussion

The case narrative illustrates how “ethics” are perceived by transfer pricing professionals within

TCO. In this section I will use Jones’ issue contingent ethical decision making model to shed a new

light on the results. While the findings focus on the theoretical framework and present the

disconnection between transfer pricing professionals’ activity and ethical behavior together with the

factors that influence this, this section aims to analyze the decision making process of these individuals.

According to Jones’ issue-contingent model of ethical decision making, first step of the process

involves moral sensitivity. Most of the interviewees showed a lack of moral sensitivity. This failure of

recognizing a moral issue is happening mainly due to the subjectivity of transfer pricing and lack of

clear transfer pricing regulations. Hence, they are unable to tell objectively what a certain price should

be and argue that argumentation is the key in establishing the rightness of a transaction, under the

belief that if a certain transaction can be defended and it is accepted by the revenue authorities, then

it is fine. This triggers an alarm signal as transfer pricing professionals are the bridge between the

society and multinationals of which declared purpose is to maximize profits. Since the multinational

enterprises are the one that decide whom to hire, the transfer pricing specialists are constrained to

follow the clients’ demands and comply strictly with the requirements of the law as this is expected by

the clients.

In the cases where the ethical dilemma is not identified, the ethical decision making process ceases

as the other stages can not occur. However, most of the times an ethical dilemma is not recognized,

there are situations where an ethical dilemma is perceived mainly because the situation represent an

issue of high moral intensity for the consultants. The moral intensity issue is presented in Jones ethical

model as an independent variable that influences all four steps of ethical decision making. This refers

to the fact that people tend to be more concerned about situations that have greater consequences,

are perceived by the society as wrong, are likely to generate harm, have an immediate effect, the

affected persons are close to them or more people are harmed as a result of this decision. An example

of an ethical dilemma mentioned by one interviewee consists of the request received from a client to

defend transfer prices that are not according to arm’s length principle as a result of an optimized tax

structure constructed by the headquarters to artificially shift profits. There was a rhetorical questioning

whether to engage in the project or no given the situation, hence in some cases there is proof of moral

recognition. In this case the moral sensitivity was present as the artificial nature of the transaction was

obvious and objective. Additionally the moral intensity was higher given the common beliefs of society

regarding artificial transactions and their great consequences.


As a failure in any step of the process could imply a failure to make an ethical decision, only in

the cases where an ethical dilemma is recognized, a moral judgment follows and the rest of the steps

in the ethical decision making process have a chance of being covered.

The second step of the moral decision making is moral judgment which consists of an evaluation

of choices and outcomes and is dependent upon the moral development of the individuals. To find

out the moral development level of the professionals, Kohlberg’s six stages of moral development is

used. Taking into consideration that following the letter of the law is a main concern for transfer

pricing consultants, the professionals are at the conventional level of the moral development, stage

four – social accord and system maintenance – as the professionals adopt the moral standards of the

society, particularly the laws. The moral judgment is made according to the boundaries of the law and

has the purpose to fulfill the clients’ expectations.

After the moral judgment, the third step in the ethical decision making model consists in moral

motivation, which implies to make a choice regarding the course of action by comparing moral factors

with other factors. This step of the process is influenced by organizational factors and also by moral

intensity. From the analyzed data, it seems that this stage is flawed as the balance between the moral

factors against other factors is always pulled down by the later. The role of advocate for the client

together with the moral intensity issue incline the balance towards a choice that is rather legal than

ethical.

The last stage of the ethical decision making model consist in engaging into the moral behavior.

As there is a failure in the ethical decision making process represented by a low moral development

and a biased moral intent, the moral behavior is not achieved. Overall, it seems that along the ethical

decision making process there are two main problems: failure to recognize an issue as being ethical

and lack of moral intention. Moreover, the moral development of transfer pricing professionals is

stuck at the rule obedience level, without focusing on the fairness of the rules.

The case narrative has highlighted that the artistic nature of transfer pricing, regulatory issues and

the professional body issues are standing between transfer pricing professionals and an ethical

behavior. Additionally, there has been highlighted a greater focus on client since it implies the

organization’s survival. It seems that enablers of this behavior can be attached to different stages of

the ethical decision making process. Specifically, the artistic nature of transfer pricing often impedes

transfer pricing professionals to acknowledge that an ethical issue exists. This problem should be

approached by policy makers by creating more specific rules and also an ethical code of conduct

focused on the transfer pricing field should be taken into consideration given the difficulties involved


by the subjectivity of this area and the lack of transfer pricing teaching during studies. More guidance

would help in distinguishing ethical issues from regular issues. The professional bodies could get

involved into the moral development of the individuals through ethical training. Also, the regulators

together with professional bodies could have a greater role in motivating the consultants to incline the

balance towards a moral decision. As regards to the client responsibility issue, more clear rules would

impede professionals in helping clients which are involved in doubtful transactions.

The case narrative also brings into discussion the risk management procedures and reputational

risks. In contrast with ethical concerns, risk management and reputation are taken seriously as they

generate more important consequences. The reputational issue is linked to the ability of the

organization to attract clients, therefore it is embedded into organization’s survival. Providing low

quality services might attract rejection of the transfer pricing documentation file by the revenue

authority or failure in succeeding into a legal dispute, which may lead to reputational issues. Moreover,

risk management procedures are linked to the reputational issues, which also links ethics into

discussion. These risk management procedures represent the control barrier for the practitioners as it

often stop them to take part in doubtful assignments.

A major influence in the current transfer pricing situation is represented by the ambiguous

legislation. It has been argued that although there are current endeavors of OECD that try to

overcome these flaws in the transfer pricing legislation, there is a low probability that a clear and

objective legislation will be created. Moreover, as it was mentioned by the interviewees, the fact that

the transfer pricing specialists are specifically hired by the companies (and not by the society) while

there are no clear rules, guides transfer pricing professionals’ behavior to comply with the limits of

the law and client’s demands and not the society’s demands. Hence, it seems that in their efforts to

design a better legislation, regulators are forgetting the fact that in their quest for survival professional

firms manage to find new grey areas. Besides legislation improvement, an alternative approach that

focuses also on key triggers of this exploration and exploitation of grey areas should be taken. This

may imply a conceptual shift in the way transfer pricing is conducted, from client accountability

towards a societal accountability. The societal accountability focus could be achieved by creating an

oversight board that oversights transfer pricing industry. This board could re-enforce the duty of

professionals to certify upon the transfer prices compliance with arm’s length principle.


6. Conclusion

This paper’s aim was to obtain an understanding of the transfer pricing professionals’ perceptions

of ethics. Prior research has focused on ethics in tax practice (Doyle et al. 2009) by reporting interview

data in Ireland and UK. This paper sought to extend and develop the prior research by looking into

controversial area of transfer pricing in the Eastern European context.

By using the theoretical framework proposed by Doyle et al. (2009) regarding eleven factors that

give rise to ethical dilemmas I found that four factors can be considered relevant in the transfer pricing

context, namely: ambiguity in the tax law, multiple stakeholders, risk management and reputation.

Within the ambiguity in the tax law the case study unveiled that the lack of clear transfer pricing

rules leads to an artistic nature of transfer pricing. This enables transfer pricing professionals to adopt

a creative stance together with a high degree of flexibility, power of argumentation and professional

judgment. This artistic nature of transfer pricing is sustained by regulatory issues and professional

body issues that fail in limiting the transfer pricing professionals’ flexibility and power. It has been

argued that in this transfer pricing area these practitioners are opinion formers with a greater

knowledge than all the other actors participants in the process, therefore they may be able to use their

argumentation forces in defending clients.

Moreover, these specialists are hired by the multinational companies while there are no clear

constraints for transfer pricing professionals to focus on any other stakeholders besides their clients

and their own firm. This is translated in the theoretical framework through an inexistent multiple

stakeholders’ issue, as only the duties towards the client and the firm are considered important. The

realization of own sense of ethical duty is made through transferring the decision making power into

the hands of the clients through providing all the relevant information to the clients.

The third and fourth factor referred to risk management and reputational issues. Risk

management procedures are important for consultants as protection of the reputation of the firm is

vital for survival. Both risk management and reputational issues were associated with a higher degree

of ethical behavior. A notable mention to be made along all these factors is that the law seems to be

the boundary, as all mentioned the importance of following the law.

Additionally, Jones’ issue-contingent model of ethical decision making was used to theorize the

findings. This revealed that the artistic nature of transfer pricing blocks the moral sensitivity of

professionals. This situation is surpassed only in cases of objective situations, which highlights that

not the moral sensitivity of transfer pricing professionals is flawed, but rather the subjectivity of the

legislation intervenes. Further on, in the ethical decision making process it was unveiled that the moral


development of transfer pricing professional is at conventional level, which implies a focus on the law.

The moral intention step is biased by the perceived need to satisfy the client’s demands, hence the

ethical behavior is not acheived.

This paper contributes to prior literature in two ways. First, it examined the tax practice in Eastern

Europe and specifically contributes to the tax practice ethics dispute by reporting interview data on

tax professionals’ perceptions of ethics in Eastern Europe. Precisely, this paper advances our

understanding by revealing that ambiguity in the tax law, multiple stakeholders, reputational issues and

risk management procedures have an effect on the activities of a tax practitioner. Secondly, this paper

examined the perceptions of ethics of transfer pricing professionals. Specifically, the findings exposed

a disconnection between transfer pricing practice and ethical behavior due to the following enablers:

the artistic nature of transfer pricing, regulatory issues and professional body issues. Moreover, the

need to fulfill the clients’ demands is also interfering between transfer pricing professionals’ activity

and an ethical behavior.

The perceptions of the transfer pricing professionals are undoubtedly influenced by the context

in which they operate. As this paper is focused on the Eastern European organization context, a

limitation of this study consist in the unfeasibility of directly transfer of the findings towards another

context. Moreover, the findings may suffer from subjectivity issues since the data has been analyzed

by a single coder.

For future research, it would be interesting to find out if similar findings would be obtained under

different institutional regimes. As the findings are dependent on the context in which the transfer

pricing professionals operate and their beliefs are influenced by the context, a change in the setting

may bring additional insights. Moreover, future research may study in-depth the ethical decision

making of transfer pricing professionals using Rest’s (1986) model and its Defining Issues Test to test

the moral reasoning of transfer pricing consultants. In addition, from interpreting the results, a

sentiment of fear of the consequences of violating the law installed, which can be translated into the

necessity of stricter rules of ethical behavior. It would be interesting to observe whether an increased

level of enforceable rules, standards would bring a noticeable effect into transfer pricing professionals’

behavior.


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Appendix 1: Interview Guide

Introduction

This interview is meant to gain necessary information for the Master’s thesis of Accounting and

Control at the University of Amsterdam. The aim of my Master’s thesis is to investigate transfer pricing

professionals’ perceptions of ethics and risk management in an Eastern European context. Hereby I

wish to gain key insights from transfer pricing professionals in practice which can reveal the key

aspects behind practitioners’ rationale as well as existent concerns. In order to do this, a theoretical

framework will be pursued that states that there are eleven different factors that give rise to ethical

pressures. The final goal of this thesis is to identify new factors that give rise to ethical pressures as

well as additional information that is specific to the transfer pricing field.

This conversation will be treated in a confidential manner, and the interview is completely

anonymous. No data will be collected which can identify the identity of the interviewee and contents

of the conversation will not be repeated to other participants of this study.

This document serves the function of an initial interview guide. The conversation can turn in

other directions than the stated interview questions indicate, depending on the experience of the

interviewee. Permission is requested to record the interview.

Introductory data interviewee: Function within the organization and years of experience within

and outside of organization. Interviewee is asked to imagine himself / herself being again at the

beginning of their career and to think whether he/ she would chose the same specialization area.


Interview questions

1. Ethics in transfer pricing

1.1. How would you describe a relationship between ethics and transfer pricing?

1.2. How would you describe the concept of ethics?

1.3. Please tell me an example when you met an ethical issue.

Do you consider that there is a difference between your approached solution and an ideal solution

from an ethical perspective?

1.4. How would you describe your organizational climate from an ethical perspective?

1.5. Do you perceive any differences between legality and ethics?

2. Factors that lead to ethical pressures

Interviewer briefly explain that a theoretical framework will be approached that discussed factors

that give rise to ethical pressures. Factors are not mentioned yet as it may influence interviewees.

2.1. Please think of factors that you have encountered in your daily work and that led to ethical

dilemmas and describe them.

After interviewees mentioned the factors encountered, the interviewer starts explaining the factors

presented in the theoretical framework and not addressed by the interviewees’ responses.

2.2. What do you think of ambiguity of tax law / multiple stakeholders / client pressure / tax

practitioner aggressiveness / business managers / reputational issues / competition /

stress / public expectation / the privilege of self-regulation?

2.3. Can you tell me if you encountered this factor before, what was the context and the

solution?

Interviewer briefly states that it is widely recognized that tax practitioners have responsibilities

towards multiple parties.

2.4. To whom do you consider yourself accountable as a transfer pricing professional?

If there are stakeholders that interviewees did not mentioned in their responses, interviewer

follows-up and complete the list of stakeholders to hear interviewees’ opinions. The list of

stakeholders consist of: client, the firm, the superiors, the revenue authority, the society, the

professional body or the own self.


3. Risk management procedures

3.1. Please describe the risk management procedures existent in your organization.

3.2. What is your involvement in these procedures?

3.3. How would you describe a relationship between risk management and ethics?

Before closing the interview, interviewer asks the interviewees to state their opinions upon the

mediatized role of transfer pricing as a tax avoidance tool.

4. Closure

Are there any other issues that you would like to highlight which have not been discussed during

the interview?

Do you have any recommendations for the following interviews?

Thank you for your time and input.

A study of transfer pricing professionals in Eastern Europe

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